Global political risk looms ever larger as a factor for wealth managers to track, even if they'd rather prefer not to do so.
The expression “end of history” that was coined around the time that the Berlin Wall came down in 1989 appears increasingly frayed around the edges. Arguably, ever since the 9/11 terrorist attacks on the US and even more since the 2008 financial crash, history has returned with a vengeance. Politics is more volatile, as seen by the rise of populism on the Left and Right, the Brexit vote and election of Donald Trump.
While some of these events are very different and have contrasting motivation factors at work, they all point to a rise in political risk, or at least a break with some of the assumptions investors have made before. And after taking a back seat as an issue in the “great moderation” era of the 1990s, charting political developments has become a necessary feature again for economists and asset allocators. For example, when Citi’s Tina Fordham was hired by that bank in 2003 to head up global analysis of political risk, it was an unusual move. Now it looks remarkably prescient.
And political risks can cost money. A new study by Willis Towers Watson and Oxford Analytica outlines the how life has turned more volatile. Some 55 per cent of global organizations with revenues greater than $1 billion experience at least one political risk loss exceeding $100 million in value. The study also shows that there is more danger from political reactions to crises in emerging market countries, as seen in nations such as Turkey recently.
“Whilst exchange transfer losses and political violence were identified as key concerns for companies, the possible consequences of populism and trade wars are also being brought into sharp focus,” Stuart Ashworth, managing director, Willis Towers Watson Financial Solutions, Asia Pacific, said.
“The global interdependency of modern business mean that companies in Asia Pacific could well suffer even if their home country was not the intended target of a trade tariff. This will be even more acute in countries whose economies are tied to or dependent on China. Reports from the Berne Union also signals that political risk is on the rise and that its members has indicated that claims from investment insurance in 2017 were the highest on the record.” (The Berne Union is a non-governmental organisation representing the insurance and trade finance sector.)
The survey authors polled executives of 40 global firms across a variety of sectors to arrive at their findings. The most frequently reported political risk related loss was exchange transfer which impacted nearly 60 per cent of those experiencing losses, followed by political violence (48 per cent) and import/export embargos (40 per cent).
The major geopolitical threats were seen as US sanctions policy, emerging market crises, protectionism/trade wars, and populism and nationalism. While Russia and Vietnam were most frequently cited as countries where losses occurred, losses were recognized throughout Europe, Latin America, APAC, Africa and the Middle East.
Almost two-thirds (60 per cent) of respondents said political risk levels had increased since last year, and nearly 70 per cent stated that they had scaled back operations in a country as a result of political risk concerns or losses. More than 70 per cent reported holding back from planned investment as a direct result of political risk concerns.
One issue that has sometimes bothered investors in emerging and frontier market economies in the past has been not just about return on investment, but arguably even more importantly, return of their investments. Russian president Vladimir Putin’s seizure of foreign energy firms' gas reserves in the Sakhalin region being just one example. But even in a developed market economy such as the UK, there’s the risk that investors could have a portion of their capital expropriated by the government if the opposition Labour Party wins power.
Political risk is therefore a clear concern for investors, as it should be. It seems that understanding of what drives markets requires wealth managers to pay attention to the political world, however tedious that can sometimes undoubtedly be.