Focus Group: Political considerations

Two-thirds of respondents to this month’s Off The Record survey have, over the past five years, taken action in their investments to try to adapt to a preponderance of political risk in financial markets.

Some have simply seen it as providing opportunities “to buy cheap assets”, or to sell others, such as “vulnerable govvies”. A Finnish fund said that it was now much more focused on political issues in discussions both internally and with its asset managers.
Others have appointed absolute-return and global macro managers. A UK fund said: “We have expanded our investments in bonds to emerging market and other sovereigns, with the intent of diversifying the risks related to political risks in financial markets.” An Italian fund added: “We have increased geographical diversification and invested with stronger focus on active managers.”

The reason: three quarters of respondents believe politics and regulatory risk are more important determinants of companies’ business prospects today than they were before 2007-08 – and not just in the financial sector.

A UK fund commented: “Business fundamentals are being drowned out by political and regulatory uncertainty, especially with regard [to] long-term growth and additional regulatory burdens.” A Swedish fund added: “We have a political crisis (not financial as the last one) and politicians have the goal to be re-elected. We have to adapt to the new world order when decisions are made after a political agenda.”

Over 85% of those polled felt that companies will find it more difficult to make strategic decisions in 2013. “Continued uncertainty with regard [to] the US spending plans, uncertainty over the euro-zone, especially Spain, and the slowing of growth in the emerging markets are the ingredients for a perfect storm of uncertainty, which is very likely to have a negative influence on many companies’ abilities to make strategic decisions in isolation of these environmental factors,” said a UK fund.

However, another UK fund stated that “companies need regulation to survive and prosper”.

Respondents were evenly split on their view of how all of this was being priced into financial markets. The number who thought markets were reflecting economies fairly rationally was the same as those that thought markets and economies had become divorced, about which a Spanish fund said: “Markets are very volatile and powerful and, as we have seen, due to this power, politicians and citizens have had to assume changes in their standards of living and implement laws that [the] market demanded.”

An equal number felt that markets had never reflected economies rationally, even before the financial crisis. A UK fund said: “Markets are like children. You love them and bask in their glory as they grow, but you don’t trust them. [They] need a firm hand.”

Some 71% of respondents said that over the past five years it had been difficult to successfully manage portfolios actively, based on company fundamentals, while 11% disagreed and 18% were neutral.

Just over half (55%) thought it would become more difficult to manage portfolios actively, based on company fundamentals, in 2013. “As politics is unpredictable and has a huge impact on pricing, company fundamentals are less and less an accurate parameter for stock behaviour,” said a Dutch fund.

A Romanian fund held the opposite view: “After the gradual stabilisation of macroeconomic prospects and [with] the ongoing deleveraging and restructuring processes starting to show results, company fundamentals should become more and more aligned with market price evolution.”

Most respondents felt bond markets, particularly government bonds, were overvalued currently. “Bond markets are too expensive, hence the ‘normal’ asset allocation between bonds and equities is not functioning properly,” commented a Danish fund.        


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