Long Term Matters: Time to pay heed to political risk
American politics are unravelling. In Roy Moore, the failed bidder for the vacant Alabama seat in the US Senate, the Republicans funded a candidate who says gays should be jailed, the country was better off under slavery, Muslims have no place in public life, and against whom allegations of sexual assault have been made.
Moore may have lost, but he still obtained nearly half of the vote. Imagine a scenario in which Robert Mueller, the special counsel investigating foreign interference in the 2016 election, were to prove President Donald Trump guilty of collusion with Russia, but Republicans were to ensure Trump is not held accountable. Or where Mueller, a Republican, backs down. Or is sacked.
With analysts happy to opine on the risks of the UK’s opposition leader, Jeremy Corbyn, becoming prime minister, surely they must be more vocal about the US? Given they got the last US election so wrong and failed to anticipate how extreme Trump was, they are on the ball this time, right?
As Brian Klaas, an expert on democracy and author of The Despot’s Apprentice, puts it: “Institutional investors are deluding themselves if they think that having Trump presidency does not expose them to unpredictable shocks to American political economy.”
Klaas explains how the damage wrought by increasingly partisan polarisation will not be easy to ‘walk back’. He says: “I often feel like I’m speaking into a void of people who don’t want to listen when I discuss these risks on places like CNBC or Bloomberg”.
Investors and their traditional advisers don’t want to go here. There’s no ‘right’ way to analyse political risk and the conclusions aren’t pretty. Trump is a long-term threat to the system even after he’s gone, and he’s a manifestation of long-term problems in US democracy.
With a deeply dysfunctional political and economic system, there are no magic bullets. Worst of all, finance is at the core of what’s wrong. Only in the US would you need a law to say fiduciaries should put their clients’ interests first. And only in the US would the financial sector successfully lobby against that law.
Much of the investment supply chain happily ignores this and other systemic risks. It’s simply not their problem – they don’t get sacked if they do it badly and they don’t get rewarded if they do it well. And wilful blindness is easy to understand when asset prices keep rising.
American leaders are also impotent with regard to risks that will impact on portfolio returns such as disruption from machine learning or climate change, where the US has gifted the next energy revolution to China. Escalating inequality is so unsustainable and the dream of social mobility such a fairy tale that a really big electoral backlash is inevitable. None will optimise growth.
Sadly it’s not only mainstream investment professionals who have their heads in the sand. Even the ESG community is unable to talk about these topics: ‘please don’t get political’ is the plaintive plea of folks who know the issue is above their pay grade.
The answer is as obvious as it is rare. Lucy Marcus, founder and CEO of Marcus Venture Consulting, says: “Continued collaboration with Trump’s White House should be viewed as akin to doing business with – and thereby propping up – corrupt governments.”
Europe won’t be insulated from US political risk. Warm reassurance – as at IPE’s recent conference, where it was stated by one speaker that political risk in Europe is on the decline for first time – do not matter. The Trump team has already meddled with the French elections, given publicity to British neo-Nazis and is closely connected with pro-Brexit advocates.
A former US national security adviser highlights how Trump says a war on Europe’s border with Russia will be NATO’s fault. Any flare up in the Middle East would affect Europe the most – it is closer for refugees and terrorists. And each day we ignore the climate crisis, so the costs increase and Europe will be destabilised.
Of course everyone has some part to play. For example, quantitative easing has desensitised markets to political risk. But what can European investment leaders do themselves?
• Investors with US offices can stand firm against the tone from the top of this White House. The ‘good’ news is that there are so many issues to choose from. Racism, gender balance, sexual harassment, business ethics, corporate political donations – the list is a long one. In your space in America, make sure the Trump team values don’t hold sway.
• C-suite and board directors can have a big influence on a wide range of peers and stakeholders. Lucy Marcus highlights that CEOs and their companies have never been more powerful, and calls on them to use “their might to fight for a better future, not for a seat at the tyrant’s table”. It is particularly important to speak to those corporate leaders who are still close to Trump.
Speaking plainly but respectfully – now is the right time to talk in public about the sunlight effect of the Mueller investigation – gets results more often than our ‘inner fence-sitter’ likes to acknowledge.
We can never know what our silence enables or what our interventions trigger. So it’s time to be creative, brave and then just hope that doing our best will be enough.
Dr Raj Thamotheram is founder and co-chair of Preventable Surprises