Increased need for understanding of political risks

Standard Life Investments (SLI) has said an understanding of political risks is becoming more important for investors, as they can create policy uncertainty with market implications.

Accordingly, SLI said it has now created an in-house process to examine political risk and identify how it can add to policy uncertainty and therefore negatively affect economic growth. It added that political risks fall into institutional or cyclical risk categories. Cyclical risks are more common in developed markets in the form of elections. Three factors can amplify cyclical risk, namely a trend to populism, or anti-establishment politics, fragmentation, or a move to multi-party systems as seen in Spain and polarisation, or a hardening of political divisions across parties and electorates, as seen in the USA.

SLI political economist, Stephanie Kelly, commented: “During our analysis of political risk, we assessed the impact of policy uncertainty on a number of major economic and market factors; the results indicate that such an uncertainty shock is usually associated with lower GDP growth, as well as downward pressure on national equity markets and the outlook for interest rates. Given that policy uncertainty has a tangible effect on economic and market indicators in developed markets, understanding the political dynamics and structures that drive this uncertainty is crucial.”