Growing political risk demands investors’ attention, says Hermes report
Increased conflict between and within countries is making political risk an increasingly important factor affecting investment portfolios, says Hermes Fund Managers.
Before 2008, political risk rarely featured as a consideration when assessing investment opportunities. Today, domestic politics is a major issue for investors across all asset classes.
Hermes Fund Managers’ report ‘Political Risk: The impact on investors’ highlights how an unpredictable fiscal regime and regulatory environment can affect an equities portfolio by influencing a company’s long-term capital expenditure decisions.
In the fixed income sector, high unemployment, austerity measures and slow economic growth can impact a sovereign credit-rating. And oil producing nations’ need to keep prices high in order to balance budgets is affecting investors’ exposure to commodities sector.
In addition, recent events in the Middle East have demonstrated how political risk remains an issue in developing economies where change continues to be brought about by the will of the people and economic issues. “In these economies, politics and economics are inextricably linked as exemplified by the Arab Spring, which was preceded by a rise in food prices,” the report says.
Today, political risk ranks alongside that of other traditional economic measures when making investment decisions. In recent years, the report says, “investors have tried to incorporate an element of geopolitical risk assessment in emerging markets investments, but it has been at least two generations since they looked at the issue of political risk in the context of developed economies. They need to start.”
Saker Nusseibeh, chief executive and head of investment, Hermes Fund Managers, said: “In the history of developed markets, political risk was once the norm, but faded as an investment consideration post-World War II. The period of great stability that followed was in part because the subsequent Cold War provided developed nations a common, external adversary to worry over. With no common ‘enemy’ anymore and mounting internal concerns, the idea we are all friends in the West is dwindling.”