An investor’s guide to political risks

Fund manager Barings has commented on the political risks faced by investors and how they should be treated.

Dr Christopher Smart, head of macro-economic and geopolitical research, said that while most political risks are temporary shocks or simply “noise”, some can be major tectonic shifts.
Smart said that in most cases shocks have a limited impact, despite occupying news headlines. Current examples of potential shocks are the collapse of Venezuela, rising tension between Iran and Saudi Arabia, or events in Korea. “If one of them does blow, however, there would more than likely be emergency monetary and fiscal measures to cushion any spike in oil prices or bond yields,” he commented. In addition, diplomatic measures would keep things under control, while regional humanitarian disasters are unlikely to cause a systemic market crisis.

Smart said that the real risks are harder to track and are found in the slow but unmistakeable realignments of global power. “Other countries like China are growing more assertive as Americans are questioning the costs of global leadership,” Smart said. He added that in the past, most developed countries were willing to work together in the face of events such as the Lehman collapse, but this might not happen now. For example, China might feel it could withstand market turmoil better than the USA, while Russia will not miss the chance to throw sand in Western economic and political gears, he said.

Smart concluded: “Failure and collapse are by no means inevitable but co-operative crisis management is much less likely today than it was 10 years ago. If you are an investor with a time horizon that extends more than a few months, keep your eyes carefully focussed on the uncertain chances of success.”