It’s all about political risk now

The term political risk conjures images of post-electoral violence in some developing country that sinks the value of your investments in it or leads to the destruction or confiscation of your assets. Better, one would think, to invest in safe, low yield investments in developed countries with political stability.

But one cannot comfortably call Western countries politically stable right now, at least as far as the impact of politics on investment is concerned. Over 2 trillion dollars in wealth was wiped out following a political decision by the people of the UK. The future of the EU is at risk from euroskeptic parties emboldened by Brexit. Donald Trump could still become US president. For anyone thinking of investing in the USA or Europe political considerations will, strangely, be paramount.

Imagine, for example, that the UK Conservative Party pick a leader who will be willing to sacrifice access to the EU single market in order to prevent free movement of people. Or think about the possible victories of far-right political candidates in Europe. It’s political risk whichever way you look. The kind of risk that spooks markets and wipes trillions off wealth.

This is not to say that political risk is low in developing countries. Not at all. But what is happening is that safe havens are becoming increasingly scarce. Over $10 trillion dollars in bonds globally have negative or zero yields. This means that people are basically paying the government for the right to lend to it because of the safety that debt provides. One may see this as a sign of extraordinary faith in government but it also a sign of extraordinary distrust in the economy and its prospects even in the long-term.

What a time for investors.


Jerome Kuseh

Accountant | Economist-in-Training | Finance Blogger

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