‘The markets hate uncertainty’. You know it, at Holborn Assets we know it, the markets and the financial policy makers know it. It’s something that has been said so many times that we all take it as read. But is it really true? And can uncertainty actually have unexpectedly positive consequences on the supposedly uncertainty-shy financial markets and the businesses that operate in them? Here are our thoughts.

An uncertain world

First up, it’s worth re-stating what has prompted us to think more deeply about this. We live, as many economic and political commentators have pointed out, in uncertain times. This feels very much like the age of the disrupter. These could be political leaders like Donald Trump, who relishes shaking up established relationships with his long-time allies while simultaneously making nice with traditional enemies. Undermining longstanding agreements and institutions like the WTO or NATO have consequences – and uncertainty in the markets is certainly one of them.

Or, the disruption could come in the form of new technologies – the transformative power of cloud computing, of AI, of smartphones and of social media. Whole sectors of the global economy – for example the car industry – are facing changes on a scale of which they have never experienced before. Again, this creates uncertainty in the markets.

Uncertainty matters

Jitters result – but is uncertainty all bad? One commentator from Bloomberg, Barry Ritholtz, suggests maybe not. One of the key reasons, he argues, is that, conversely, it is actually the times of certainty that we need to be wary of – particularly when it comes to the markets.

“Recall the dot-com era, when everyone knew that profits no longer mattered,” he says. “Uncertainty seemed to be banished. An epic crash followed. After the Internet implosion, the opposite extreme was operational: Profitable, debt-free tech companies were being traded for less than book value. In a few rare instances, they were being sold for less than cash on hand. Investors had become certain that a dollar was worth only 75 cents.”

‘Uncertainty’, for Ritholtz, is a synonym for ‘risk’ – something which he points out is essential for performance. So, as a prospective investor, it’s your job to decide the degree of risk (or uncertainty) you’re prepared to take on. An investment without this element of uncertainty is one that offers a potential investor no opportunity to find a way of outperforming the rest of the market – surely the goal of any speculator.

It’s an interesting and refreshing way of looking at this idea of uncertainty – and is well worth bearing in mind the next time you hear an anxious-looking commentator telling you that ‘the markets hate uncertainty’.