How politics affect markets
12 September 2008
Investors should pay more attention to political developments, as these will have major effects on financial markets in coming months, according to analysis published today by leading investment house, Standard Life Investments.
In the latest edition of Global Insight, its monthly investment view, Standard Life Investments demonstrates how politics influence financial markets, covering a range of concerns such as growing geopolitical risks, the on-going battle to secure scarce resources, the rise of protectionism, and regulatory changes, all of which can affect future corporate profits.
Frances Hudson, Global Thematic Strategist at Standard Life Investments, said:
“The interaction of politics and financial markets is of growing concern for investors. Recently there has been an upturn in geopolitical risks: Russia’s deteriorating relationship with other countries is a prime example. This is partly political - Russia's hegemonic ambitions regarding its former satellite states - and partly commercial - Russia's intent to form a natural gas equivalent of OPEC incorporating Central Asian, North African and Middle Eastern states. Investors have been worried: the rouble has fallen 6% since early July, while the Russian equity market has been weak, over and above that stemming from lower oil prices. Whether the situation escalates and sanctions are introduced will be of considerable importance.”
“Ahead of November’s US election, there is a wealth of analysis of the election cycle, that tells us, for example, that the market rises more if the incumbent party wins. The dollar has benefited more under Democratic administrations while bonds are favoured more under Republican. This time around the sector-level consequences of a potential Democratic win are likely to be more spending on health and a sympathetic hearing for alternative energy and environmental initiatives while the potential losers are investment banks and brokers, credit card companies, oil majors and high-yielding energy and telecoms companies. Defence spending looks set to remain high for the medium term, irrespective of who wins. Congress already has Democrat majorities in both the Senate and the House of Representatives. Hence, any changes to the balance of power will dictate the pace of future tax changes and protectionist measures.
“As the credit squeeze evolves, various governments are becoming more directly, albeit not always willingly, involved in individual financial companies – most noticeably the US administration first taking on Bear Stearns’ debt and now taking ownership of the Government Sponsored Enterprises, Fannie Mae and Freddie Mac. The near collapse of the GSEs is emblematic of the problems in the US financial sector. Despite favourable financing terms, equity falls left them undercapitalised. The US authority’s attempts to offer a flexible workout have at times added to market uncertainty, and scepticism on the effectiveness of the regulatory response persists. The size of the bill to the taxpayer could run to hundreds of billions of dollars, but again the election result will matter as McCain and Obama have differing views on the future of the GSEs. Looking further ahead, it is still too early to assess the regulatory impact on the financial sector in the wake of the credit crunch. ”
“Global investors need to be aware how economic cycles and politics can overlap, on occasion considerably amplifying each other. Investment cycles are driven by different factors, whether economic, societal, psychological or political. The extent of any bear market phase, the inflection point and the degree of the recovery afterwards, can all be influenced by political events. Some political events come as surprises, but often the trends can be identified well in advance. Hence, investors should pay close attention to electoral cycles and politics in their research; political turning points can be a key determinant of capital flows.”
