Leading industry figures Wayne Bowers, Philip Chandler, CFA, Eoin Murray, Thomas Schäubli, and Jason Voss, CFA discuss the challenges that investment professionals face when managing political and event risks, and look at some of the implications of recent political developments.
In this roundtable, originally published in CFA UK’s magazineProfessional Investor(PI),we continue the discussion on the subject of political risk. You can read the previous questions of the conversation here.
PI: What are the biggest risks that you see going forward, whether political risk, or event risk? How will this affect markets?
Wayne Bowers: There is likely to be a prolonged period of uncertainty in European and UK markets with volatility in related currencies. Further risks lie ahead with the US election in November and elections in Europe into 2017. At Northern Trust Asset Management, we believe one of the main risks currently is central bank fatigue. Investors, politicians and some central bankers are increasingly raising questions on the benefits of accommodative policy. Loss of confidence would be self-defeating for its effectiveness going forward. Brexit, which is the “tip of the spear” for the populist movement is another risk that could affect markets going forward. This will mainly depend on its evolution and influence on others – most directly on other European countries looking to leave the European Union. Despite broad market interest in US elections, we view political developments as one of many potential drivers of financial market fundamentals.
Thomas Schäubli: From the Swiss perspective, it’s definitely the future of the relationship between Switzerland and the EU. A topic that has become much more complicated, by the way, after the Brexit vote. From a broader perspective, we are seriously troubled by the return of geopolitical tensions. For a few years, it looked as if failed states and terrorism would be the greatest security challenges of our time. Now, tensions in the South China Sea are rising; Russia is destabilizing the EU’s borders; and Syria is the site of a great power proxy war, something many of us deemed a thing of the past. If one of these developments would suddenly escalate, it would almost certainly seriously shake up financial markets. But in the meantime, the most immediate risks are the constitutional referendum in Italy and of course the upcoming elections in France, the Netherlands and Germany, which all face serious domestic challenges.
Philip Chandler: There are a host of big risks out there: the intertwining of economic and political fates across developed markets, the future of Europe, and Chinese debt to name but three; but perhaps the biggest risk for investors is the opportunity cost of sitting on the sidelines if we’re too afraid to take risk. Ultimately it’s all about good portfolio construction which allows us to take diversified risks that we’re comfortable with.
Eoin Murray: Currently there are a large number of political risks on the horizon – some, like the outcome of the US elections, are well understood, while others, such as the upcoming Italian constitutional referendum, will be less so. The Troika must embark on further negotiations with a Greece that is still weighed down by debt and hampered by the burden of austerity, while next year the new, incoming US president must deal with raising the debt ceiling. In terms of elections, the Netherlands, France and Germany all head to the ballot box over the next year or so, the results of which, including the potential for EU disintegration, might all have implications for financial markets.
Jason Voss: The rise of populist movements on the left and right and their unification in being anti-capitalist is a large risk. Another is the ongoing dispute over shipping ways in the South and East China Seas that look set to boil over in the near future. Yet another risk is the possible dissolution of the EU owing to its continued low economic growth, inability to coordinate fiscal policies, and failing demographics. Last, is the very poor demographics of most of the top GDP performers globally. In other words, these populations are rapidly aging and not being replaced by younger generations. This promises to keep economic growth low, and political tensions high.