Politics is increasingly becoming a source of market volatility in developed markets, as witnessed recently by the U.S. debt ceiling crisis and the ongoing bailout of Greece and other struggling European peripheral nations.
Investment managers are paying closer attention to politics, supplementing their risk management approaches with scenario analysis, and even bottom-up stock pickers are starting to look harder at macro issues.
“Absolutely” politics has become more important to investors, said Andrew Kirton, London-based global chief investment officer at Mercer LLC. “Sorting out the mess in Europe and the debt ceiling issues in the U.S. are, more than anything, political issues, or issues which require the politicians to get their act together.”
It's “unquestionably the case” that politics is more important, said Jeremy Thomas, CIO of U.K. equities at RCM UK Ltd., London. “We went through the better part of 20 years where no action from politicians was seen as a positive thing. We're now in a situation where if governments don't do something, we'll have a disaster.”
Politics has become more important to investors “because you need to think about — or second guess as best you can — the activities of those who can change the rules of the game,” added Ralph Frank, head of solutions at fiduciary manager Cardano Risk Management BV, London.
Politicians and governments create volatility by moving too slowly and not fully understanding issues that affect investments, experts said.
“The concern in markets is that politicians don't get it,” Mr. Thomas said.
Richard Lacaille, London-based global CIO at State Street Global Advisors, said although the importance of politics has grown, “it's very asset-class or style dependent,” affecting currency and fixed income more than bottom-up stock pickers. The reason: Macroeconomics and politics are bigger drivers of return in currency and fixed income.
He said SSgA managers primarily look at politics as part of risk management. “You want to insulate yourself from unpredictable events, and that's not been easy in the last several months, let alone the last few years, in fixed-income and currency markets,” he said.
But Chris Thompson, managing director and head of global equity manager research at Rogerscasey Inc., Darien, Conn., said equity managers — even bottom-up stock pickers — are dealing with the same issues. “Almost any (equity) sector now can have an element of, what will happen at the political level and how will that affect investors,” he said.
RCM's Mr. Thomas noted that macro factors like politics can directly affect stock selection — such as through discount rates used to value companies — and affect sectors through possible changes to regulations and tax rates.