Dan Jones  

Time to start taking political risk much more seriously

Dan Jones

Political risk has been a feature of 2016 for developed market analysts and commentators, but perhaps not so much for intermediaries and fund buyers.

The concept tends to split opinion among long-term investors. For every manager who worries about the impact of political developments on their holdings, there’s another who tends to take a more relaxed attitude, relying instead on their portfolio’s ability to come good in the long term.

And advisers tend to subscribe to the second philosophy. They may look at Brexit and feel justified in doing so. In sterling terms, the negative stockmarket reaction was erased in a matter of days - for now, at least.

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In fact, most investments have flourished since the referendum. Even those areas perceived to be most at risk from a Leave vote – domestic-focused smaller companies – have done well. So perhaps it’s as you were; clients need not worry.

I think there’s a case to made for taking developed market political risk more seriously. Populist insurrections aren’t just making themselves heard via Brexit and Donald Trump. The support they have achieved means politicians of all stripes are now paying attention. The terms of the debate have shifted. This, in turn, will mean policies which are less business friendly than the standard to which investors have become accustomed.

We’re now two weeks away from the next big political event of the year: the US presidential election. A take-it-as-it-comes mindset seems even more prevalent here than with Brexit. One of the most polarising campaigns in history doesn’t appear to be much of a concern to fund managers.

Part of the thinking behind this may be based on a faith in US political gridlock. A win for Hillary Clinton now looks odds on (though where have we heard that before), but it’s assumed control of Congress will remain with the Republicans. That mix would not lend itself to a welter of political change.

But as Mr Trump continues to drop in the polls, and the divides in the Republican party deepen, there must be a chance that the Democrats can muster a majority in the Senate and perhaps even in the House of Representatives.

The last time this happened was in 2009, and what followed was a hugely active legislative period: think, in particular, of Dodd-Frank financial reform and ‘Obamacare’.

So if US politics does become one-way traffic once again, perhaps Mrs Clinton’s vocal calls to better regulate drug prices will become a reality.

With a Clinton presidency looming, pharmaceutical shares – a favourite of many US and global equity funds –have begun markedly underperforming the S&P 500 index again over the past three months, dropping 9 per cent compared with a 1 per cent fall in the index. Early-warning signs like these are another reason to think political risk can be ignored no longer, whatever your time horizon.