Greatest investment risk in 2011 is political
Risk induced by central policymakers will continue to affect market volatility into 2011, warns UK insurer giant Standard Life, while African nations dominate the list of the most volatile investment regions in the latest geo-political risk analysis
Uncertainty over what measures policymakers will pursue to support global economic recovery means policy itself presents the biggest risk to financial markets, according to the latest findings from Standard Life.
“Markets are subject to much political uncertainty, in the sense that investors face major risks from the effects of decisions which governments do or do not take,” head of global strategy at Standard Life Andrew Milligan said.
He highlighted the threat posed by debt in Europe, inflation in China, and policy error in the US.
European economic growth is forecast to slow down in 2011 to 1-2%, compared with 2-3% growth in 2010, in response to fiscal adjustment programmes in the UK and peripheral economies.
China is flagged as a risk due to inflationary pressures, particularly in foodstuffs, and residential and commercial property. Currently, consumer inflation in China sits at about 5% p.a. “An increase to 6-7%, especially if core inflation looked under pressure, would require a more forceful response,” Milligan said.
The US is given warning signs due to its bloated budget deficit, $1.25-1.5 trillion, some 10% of GDP, with its state and municipal budgets also in “serious trouble”.
Meanwhile, in spite of quantitative easing, the US bond market sold off ‘aggressively’, and 30-year mortgage rates reached 5%.
“Geopolitical risks and margin pressures should not be under-estimated”, said Milligan. UK insurer Standard Life urged investors to incorporate more country and currency analysis when compiling their portfolios in future.
Milligan recommends a move away from sovereigns and towards corporates. He favours high-yielding corporate bonds over sovereign bonds, due to the uncertainty raised by QE and sovereign risk. He also advocates a mix of credit, commercial property and equity, in support of capital growth and income.
The latest report from Maplecroft, a global risk advisory firm, included five African nations in the top 11 countries categorised as “extreme risk” for investment. Among those, Somalia topped the list.
A surprise addition came from Russia, which entered the top 10 for the first time. Islamic separatist activity, including the Moscow Metro bombing in March 2010, fuelled the greater risk attached to investment in Russia. Corruption, poor corporate governance, and an ineffective legal and regulatory system are also blamed.
Some emerging economies fell into the “high risk” band, including India (26) and China (62). Brazil was rated as medium risk, ranking as 94 of 196 evaluated economies.