Analysing Politics Seldom Makes You Money

Analysing politics seldom makes you money : Do investors worry too much about the political environment?

On a recent visit to South Africa, globally-renowned political scientist Ian Bremmer said that the current state of global geopolitics is unlike anything he has ever seen. “The geopolitical environment is now, I think, the principle driver of uncertainty in global markets over the next few years,” said Bremmer. “This has been my gig for 25 years and I’ve never said that before.” It’s a sentiment that most investors can relate to. All over the world, politics is dominating conversations about where to invest and what to invest in.

However, speaking at the Old Mutual Investment Managers Conference in Cape Town this week, portfolio manager within the Old Mutual MacroSolutions boutique, Arthur Karas, questioned whether investors were paying too much attention to political noise. “Politics is pretty pointless when it comes to investing,” said Karas. “Analysing politics very seldom makes you money and very seldom gives you an idea of what to do with your money right now.” He noted that this doesn’t mean that the political environment does not represent significant risks, but that it’s impossible to know how these will play out. “Make no mistake, Trump is not the normal American president,” said Karas. “However a lot of time politicians talk, but don’t actually do anything. Or the things that they do, do take a long time to have an impact.” As an example he pointed out that the changes Bill Clinton introduced to the housing laws in the US only had an impact on the economy that George W Bush and Barack Obama had to deal with.

This means that there is a great deal of uncertainty around what Trump will actually achieve, or won’t. And it’s impossible to make investment decisions based on outcomes you can’t forecast. Brexit poses a similar problem. As a Bundesbank official in Germany noted, Brexit is either going to be hard or very hard. “It has the potential to be extremely disruptive to the UK,” said Karas. “But there are any number of things you can’t forecast. Nobody knows what is going to happen because this is uncharted territory. It’s not a science problem that can be solved if you have the right maths.”

In South Africa, the level of uncertainty is also extremely high. The ruling party appears to be fighting with itself and there is no way of knowing how it will be resolved. “We’ve had a fairly stable political environment in South Africa for 20 years,” said Karas. “The risk now is that that might no longer be the case. If we can’t resolve the issues of state capture then we might move closer to a country like Russia, but you can’t predict that with a high level of confidence.” This is significant for investors, because you can’t afford to make decisions based on alarming news if you don’t know what the ultimate result will be. “It’s fun to talk about politics, but you can’t forecast where these things are going to go,” Karas said. “You do however need to be able to cope with them as an investor.” That means diversifying. Karas argued that it’s important to look at all the different assets one can include in a portfolio so that you have a number of different sources of risk and return.

For instance, when looking at South African equities it’s important to have exposure to companies that will benefit if the country surprises and does well, such as local banks and retailers, but also to rand hedge stocks that will protect you against a weakening currency. “Too many people are short-term focused and get sucked in to what is happening right now,” said Karas. “But you need diversification, and you need to take into account that we are in a low-return world. Markets will not deliver the kinds of returns we have seen in the recent past and investors must be prepared for that.”

Patrick Cairns | Moneyweb| 26 May 2017


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