Jim Parker, Vice President, Dimensional Fund Advisors  May 2019

Australia’s recent federal election result not only confounded the pollsters, the pundits and the punters, it provided another lesson about the dangers of using political news headlines to guide your investment strategy. By just about every measure, the Australian Labor Party was seen as the overwhelming favourite to defeat the six-year-old Liberal-National Coalition government in the May 18 election by securing a majority in the 151-seat House of Representatives.

In the weeks leading up to the election, every major opinion polling company—from Newspoll to Ipsos to Galaxy to Essential to Morgan—had Labor ahead either at 52-48% or 51-49% on a two-party preferred basis. As well, the view of most media pundits was that Labor would almost certainly get across the line, with only the margin of victory in doubt. The bookmakers were also confident of the outcome, with the ALP at odds of as skinny as $1.16 in the days before the poll. Before polling day, one agency even paid out $1.3 million to gamblers who had backed Labor early in the process. As it turned out, the election outcome defied them all.

The Coalition secured a slight majority in the House of Representatives. Labor’s expectations of solid gains in Victoria were foiled, while the electorate swung heavily against it in Queensland and Tasmania in particular. The overall result was almost the exact opposite of what the pollsters predicted, with the Coalition ahead 51-49%. While others comb over the political implications, the lessons for investors are familiar.

News is quickly built into securities prices and unless you can predict what tomorrow’s news will be, you will struggle to do better than by just accepting market pricing and building a diversified portfolio around the long-term drivers of higher expected returns. For instance, in the months leading up to the election, some investors predicted that Labor’s announced policies on franking credit refunds, negative gearing and capital gains taxes would have a negative impact on banks and financial services companies, while its plan to cap annual health insurance premium increases might hurt listed health insurers.

When the election result confounded just about everyone’s expectations, the pricing of stocks in those sectors adjusted to reflect the outcome. The lesson is that markets are constantly changing their assessments about expected returns based on new information. Trying to second guess prices requires getting two things right—what will happen next and how the market will react to it.

Pundits were similarly wrongfooted in other votes in recent years. In 2016, ahead of Britain’s referendum on leaving the European Union, there were predictions of turmoil in global markets should the ‘leave’ camp win the vote1. To be sure, there was an adverse reaction initially to the unexpected victory by the Brexiteers. But this reaction was short-lived. By October of that year, the UK benchmark FTSE-100 index was near record highs, with analysts attributing the gains to the competitive advantages provided to British companies by the weaker pound2.

Likewise, ahead of the US presidential election that year, there were media predictions of a market decline if Donald Trump won. CNN ran with the headline that a Trump win would ‘sink stocks’3. The Atlantic said investors were terrified of a Trump victory. Yet in the two and a half years since his election, the S&P 500 has gained more than 35%, hitting repeated highs and reaching record levels by April this year. We should expect that markets will continually weigh the implications of political, economic and other news on expected returns. People can make predictions about political outcomes. But we have seen that this is a haphazard occupation. And even if you did anticipate what would happen, there is still no guarantee the market will move in the way you expect.

Geopolitics is only one of a myriad of influences on markets. And separating any one influence out is extremely difficult. By all means take an active interest in political news as a citizen. But as an investor, it’s a tough ask to build a strategy around it. That all suggests the best approach is to focus on your own investment goals, build a diversified portfolio aimed at getting you there and let markets deal with the news.

This article has been prepared and is provided in Australia by DFA Australia Limited (AFS Licence No. 238093, ABN 46 065 937 671). The article
is provided for informational purposes only. Any opinions expressed in this article reflect the authors judgment at the date of publication and are
subject to change. No account has been taken of the objectives, financial situation, or needs of any particular person. Accordingly, to the extent this
material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having
regard to the investor’s objectives, financial situation, and needs. This is not an offer or recommendation to buy or sell securities or other financial
products, nor a solicitation for deposits or other business, whether directly or indirectly. ©2019 Dimensional Fund Advisors LP. All rights reserved.

1. Brexit Could Unravel the Global Markets, Fortune, June 20, 2016.
2. FTSE 100 Nears Record High as UK Exporters Take Advantage of Pound Collapse, The Independent, October 11, 2016.
3. ‘A Trump Win Would Sink Stocks’, CNN, Oct 24, 2016. ‘Why Investors are Terrified of a President Trump’, The Atlantic, October 24, 2016.