Politics: the risk that is most often overlooked

FS Adam Lewis 160 byline

When it comes to assessing risk fund managers and commentators often cite such subjects as inflation, interest rates and a host of other macroeconomic data as areas that could hinder investment performance. The US fiscal cliff is one of the new favourite areas of debate and in this week’s Trends UBS’s Curt Custard provides three possible scenarios for how that could pan out on markets.

However rarely does much time seem to get spent discussing political risk. Their often seems to be an attitude that there are some things managers simply cannot control or measure for. For example no-one could have factored in for the tragic events of 9/11 and its subsequent effect of global stockmarkets.

This week’s cover story by Kira Nickerson looks at the increasing importance of assessing political risk in portfolios rather than just focussing on the macro data. Indeed most fund management firms often have regular asset allocation meetings in which in which the macro outlook is discussed and decisions on where to buy, sell, or stick with are taken.

The question is, do they have similar meetings in which the impacts of political risks are so heavily discussed? Do managers indeed have the prerequisite knowledge of understanding the politics of these countries, especially in the far flung Frontier and emerging markets? Or do they just shun countries where there is perceived greater political risk, such as Argentina, which earlier this year nationalised the Spanish-owned part of oil company YPF.

But it is not just an emerging market concern, political risk is also growing in the developed world. Look at what is happening in Europe, with the deepening crisis having a major impact on government policies. The US too is not immune, with future policy action inevitable due to the looming fiscal cliff.

According to a recent paper from Hermes, asset managers need to start employing political analysts to their investment desks and become as aware of the political landscape in all markets as they are of the economics.

Lastly this week’s Fund Strategy sees the introduction of a new feature. We have teamed up with FE to bring you a monthly feature written by the head of FE Research, Rob Gleeson, which examines key trends and issues in the market and their impact of the funds universe. This week he examines the inflation/deflation debate and which funds to consider in this environment.