Investors should pay more attention to overlapping economic and political developments which could affect financial markets, urges Standard Life Investments (SLI.)
Growing geopolitical risks, the on-going battle to secure scarce resources, the rise of protectionism and regulatory changes are all political issues which can affect future corporate profits, says SLI.
Frances Hudson, global thematic strategist at SLI, says: "Global investors need to be aware how economic cycles and politics can overlap, on occasion considerably amplifying each other.”
She believes 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."
She considers there has been an upturn in geopolitical risks, of which Russia’s deteriorating relationship with other countries, is a prime example.
“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 the US election, Hudson says there is a wealth of analysis that shows 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. The potential losers are investment banks and brokers, credit card companies, oil majors and high-yielding energy and telecoms companies.”
As the credit squeeze evolves, various governments are becoming more directly involved in individual financial companies. The US administration first took on Bear Stearns’ debt and has now taken ownership of the Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac, says Hudson.
“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.”
She believes the size of the bill to the taxpayer could run into hundreds of billions of dollars, although the future of GSEs is dependent on who wins the US election.
“Looking further ahead, it is still too early to assess the regulatory impact on the financial sector in the wake of the credit crunch.”
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