So August was predicted to be rocky and it didn't disappoint, but just like the weather there have been few glimmers of an Indian Summer in the stock markets so far in September. "When will things get better?", sometimes just "will things get better?" are the questions often asked at this time and fundamentally we believe things must get better.
The doomsayers amongst us only read the poor data results, they ignore the encouraging reports which do exist. I guess popular interest fuels that melancholic tone, but we wouldn't take bets on sentiment turning on a sixpence as soon as the popular mood starts yearning for optimism.
So what is holding back optimism? We would argue political risk is the key. Some political risk is obvious and justifiably nerve-jangling, Libya and Zimbabwe being good examples. However, there seems to be growing evidence that the political risk in the new world order, ie the developing nations is potentially less threatening to global stability over the coming 12 months than political risk in the old world.
Maybe that's a sweeping statement, but we can draw on recent examples of point-scoring delays in the USA addressing their debt levels and endless prevarication in Europe regarding the periphery states, as evidence that political risk in the Western world could cause the biggest market swings in the near future. The reason for the delays - forthcoming elections. The USA and Germany both face elections in the not too distant future, Belgium hasn't had a Parliament for months and the UK is still working with the coalition. The decisions aren't easy, but popular opinion and soapbox speeches are in danger of deciding economic outcomes rather than pragmatic diplomacy.
It is no coincidence that Russia and China don't get dragged into these debates, for the political risk there is entirely different. Yes, there are human rights and ethical issues to address in those countries, for which we aren't their champions, but it cannot be doubted that they manage their economies well and take decisive action when needed to stimulate growth or austerity - China's action on interest rates and Russia's oil tariffs are good examples of these countries protecting their own interests to maintain GDP growth. The political risk in these countries is not about forthcoming elections or changes of direction and so they don't threaten economic growth for the rest of the globe in the same way Western leaders can affect it. Whether or not you would want to live under these regimes, traditional political risk is actually one of the least threatening aspects of investing into the regions, ironically you know what you are getting when you invest there, not something quite so easily predictable in the West.
The debate about developed nations vs developing nations can rumble on, particularly when markets are volatile, but when we consider what are the risks, what can we try to predict and where should we look to invest, sometimes the questions throw up unexpected answers; the changing impact of political risk being a prime example.
Tags: USA, Europe, Germany, Belgium, UK, Russia, China