Asset managers develop strategies to deal with ‘difficult politics
In mid-2010, the global sector analysts at Union Investment were called to Frankfurt headquarters for a crucial meeting.
It was not only to discuss matters such as the economy, interest rates and markets. It was also, as Union’s head of equities Michael Schmidt (pictured) explains, to discuss a key question that would affect all these areas profoundly: the influence of politicians on markets.
“It was the first time we looked at how to really embed political analysis into our ongoing analysis. Political analysis is influencing the longer-term picture. Who would have thought, for example, the Greek prime minister or Slovakian opposition party would play important roles in our thinking?”
Politics and regulatory effects have always been on his team’s analytical radar, but as he says: “These have become more relevant recently than a year ago.”
The influence politicians and their macroeconomic decisions had on markets last year was unquestionable. Tomorrow markets will watch Brussels intently as EU leaders meet to work out what is widely viewed as a make-or-break deal to save the eurozone.
Since 1010, markets have moved, sometimes violently, as politicians took – or failed to take – decisions regarding trans-Atlantic debt mountains.
They jumped as leaders in Ireland, Greece, Italy and Spain lost power, and they vacillated as politicians tried to predict which policies the markets themselves would accept.
The Vix ‘fear index’ jumped 20% in 24 hours when Greece’s former prime minister George Papandreou announced an austerity referendum.
German shares rose 7% when eurozone leaders agreed to double the €440bn bailout fund, then fell as sharply in the following week as the European Financial Stability Facility roadshows failed to gather cash, and pressure grew for the heads of Papandreou and Italy’s Silvio Berlusconi.
Consequently, a study from Allianz Global Investors finds almost three quarters of the Dutch, two thirds of Italians and half of Germans believe more than half their investment risk is being determined by policy makers.
Wolfgang Mader, from risk consultants Risklab, says: “If you think about the rescue packages put together in the bond markets, political influence is becoming more important in current conditions.”
Although Schmidt feels eurozone politicians will ultimately find a workable solution to the bloc’s trauma, he says: “At the moment with the politicians, it is like being in the middle of the sea and told calmly ‘Don’t worry, we will not drown’.
“Politicians are still behind the curve. We need a vision of how Europe could look in terms of institutions, and what financial instruments there should be from the eurozone.”