Consistent Returns in a Changing World: Managing Political Risk Across Developed Market Equities

A powerful cocktail of economic headwinds, disparities in income between rich and poor, polarisation in beliefs and sporadic ‘lone wolf’ terrorist attacks has conspired to destabilise the political landscape across much of the developed world. Recent elections and referenda have had unforeseen results. Anti-establishment sentiment has flourished. Over recent years political risk has become accentuated, and has arguably not been so acute for a generation. Many of today’s active equity managers investing in developed markets have not faced the challenge of managing such specific political risks before in their investment careers.

For some time now markets have relied on the central bank put, that is, the belief that central banks would always be able to step in to avert a crisis. Belief in central banks’ omnipotence has propped up markets during times of elevated risk. It may be that investors have become desensitised to risk, numbed by years of accommodative policy by central banks. Certainly, conventional metrics of market volatility are at record lows.

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