How The Political Revolving Door Influences Investing

The world may seem a different place in a few months as a serious of political events unleashes uncertainty about the future of several developed countries.

And that political uncertainty is one of the factors that undermines economic growth and market sentiment, according to a detailed study by economist Stephanie Kelly of financial firm Standard Life.

Her theory is that each of the forthcoming political events comes with a package of risks for investors.

During the next six months, the political timetable includes:

  • Electing a new US President – with a good chance the unpredictable Donald Trump may win the White House
  • British Prime Minister Theresa May pushing the Brexit button and launching the country on the path to leaving the European Union within two years
  • The result of a constitutional referendum in Italy will be in
  • Voters in The Netherlands will have voted for a new government
  • French president Francois Hollande will be campaigning for re-election

Kelly has devised a process for analysing the risk attached to each political event.

Uncertainty and risk

She argues that she can test the political effect of elections on investments with a detailed check list of the drivers that impact on market performance.

“Traditionally, political uncertainty, and the associated negative effect on asset prices, has been more commonly associated with emerging markets. This is because such countries tend to carry more institutional political risk,” Kelly said.

“Developed economies carry their own forms of political risk, most commonly in the form of cyclical risk. Well-established democracies in developed markets involve election cycles and ordinarily transparent policymaking.

Investment insight

“While these cyclical factors can be positive for investors in terms of ease of doing business, our taxonomy isolates the recent rise in populism, fragmentation and polarisation in developed market politics in the wake of the global financial crisis. These factors amplify the risks that regular cyclical events carry.”

Kelly is quick to point out that her analysis does not predict the future, but gives an insight into how political risk might affect the performance of markets and investments.

“Political policy has a profound effect on economic and market indicators and understanding how this works is crucial for investors,” she said.