Political risk has been increasingly at the forefront of investors’ minds in 2014 after series of tense standoffs brought the spectre of contagion between politics and risk assets firmly into view.The Scottish independence referendum and a potential vote in 2017 that could end the status quo of the UK’s membership of the European Union have loomed large on investors and fund managers’ horizons this year.
Further afield, the continuing stand-off between Ukraine and Russia and the rise of the Islamic State in Syria and Iraq have provided additional worry for markets.
However, the result of next year’s UK elections is more keenly debated at present following an increasingly strong performance by UKIP, which gained its second seat in the House of Commons last week.
The results of the next general election is widely seen as too close to call with any certainty.
Chatfeild-Roberts says investors and fund managers may be worrying too much about this and recommends they instead concentrate on fundamentals.
“[Elections] generate a huge amount of media coverage – we all watch the television and read newspapers – but in monetary terms it is mostly noise,” he said.
“Perhaps I am a bit cynical but I think all the noise around this election – you’ve got to cut through it.”
However he concedes that political risk can have an effect on currency, which has been a major headwind for earnings already in 2014 due a period of prolonged strength, and fixed income assets.
“Where it can pop up a bit is in the currency or in the bond market. When you look at the FTSE most of the earnings are coming from abroad and so it is really the currency that is the important thing there. Therefore at the margin that may be an issue for currency investors,” he said.
“Going back to the last election in 2010, there was quite a frisson about ‘will there be coalition or won’t there’ and if there is won't sterling fall out of bed? However in 1974 when we ended up with a minority government under Harold Wilson, and sterling actually went up which is exactly what happened in 2010.”
But the manager says coming out of the European Union would be a much bigger issue for investors.
“Right now gilts are moving in lock step with the European bond markets. For the past five years they have been moving in line with US treasuries and now 10-year gilts have started to diverge and are going with the European bonds, which isn't surprising because Europe is essentially in recession and 40 per cent of exports go to Europe.”
Chatfeild-Roberts says politics can, however, have a significant effect on equity markets in certain cases, particularly in emerging market countries.
“India's elections have a huge impact in the sense that they have now got a government that is pro-business. You can compare that to Mrs Thatcher being elected in 1979.”
“We should have bought India as soon as Modi was elected or even last September when people started thinking he might be elected.”
The India equity market has surged over the past year with the MSCI India up more than 40 per cent. In comparison, the MSCI World has gained 12.6 per cent.
Performance of indices in 2014
Source: FE Analytics
In contrast to Chatfeild-Roberts’ argument, Nigel Green, chief executive of DeVere Group, told FE Trustnet that financial markets are likely to see greater turbulence in the run-up to the 2015 general election specifically due to the rise of UKIP.
He says investors should prepare their portfolios for greater volatility and uncertainty accordingly, while Alex Wright, portfolio manager of the £2.7bn Fidelity Special Situations fund, says the impact of political risk means he has ramped up scrutiny of events, particularly in reference to 2015 UK election.
“As a bottom-up stock picker, I am reluctant to spend my time on political analysis but regrettably the highly uncertain outlook for the UK political landscape presents a risk for many companies in my investment universe,” he said.
“As a result, I have been spending some time understanding the various moving parts in next year’s general election and beyond.”
“That said, as a bottom up stock picker, I am not inclined to position the portfolio in the expectation of a particular political outcome as I have no reason to believe I can predict this. Today, the UK economy is looking healthy enough for the time being, with the recovery finally starting to show signs of seeping into areas of the economy it has thus far eluded.”
