Politics has always been a driving force behind investor sentiment and market behaviour. Historically, geopolitical risk has been concentrated in emerging markets and smaller countries, but recent years have seen it creep into the more developed markets. For example, during the past five years, political tensions in the eurozone have caused investors to have to learn to overcome market shifts caused by debt crises and reaction to any international affairs. Political uncertainty can lead to social unrest, as seen in Greece and Spain, while there were month-long protests in 2012.
Going back slightly further, the global financial crisis in 2008 saw large-scale political intervention to help bail out international firms such as AIG, HBOS and Merrill Lynch. Since then, investors and economists have been trying to predict the market based on political movements.
Emerging from the dark?
However, this does not mean emerging markets are out of the woods yet. There are still many tensions that affect investment decisions and fund sales. But, this past year, focus has turned away from Cyprus, Greece and Spain, and back towards countries such as Syria, Russia and Ukraine. Geopolitical risk remains prevalent, meaning more recent political uncertainty adds to investor risk assessment. There are extremists taking over territory in both Iraq and Syria, tensions between Israel and Palestine are still rife and there have been children kidnapped in Nigeria by Boko Haram. Despite all this unrest, equity markets across the globe have been seeing near all-time highs.
So how significant is geopolitical risk to managers, and does politics still play a part within their investment process and strategy?
Mark Mobius, executive chairman of Templeton Emerging Markets Group, says politics is important everywhere – not just in riskier markets. “In the US, politics has a tremendous impact, for example. If Congress and the president want to bail out banks and spend enormous amounts of money on it then the markets will be impacted to a great degree. It’s difficult, if not impossible, to differentiate between what is ‘riskier’ since all markets have risk.”
He adds that perhaps one of the best examples of how politics plays an important role would be Venezuela, which at one time was considered a relatively ‘safe’ market without much risk. “But then, when Chavez took over, politics was in the driver’s seat and the economy, along with the stock market, was ruined.”
