2014 has rapidly turned into the year of geopolitics. Here are some of the key developments.
The EU meanwhile faces its own internal political hurdles in the near future.
Consider the debate in the UK around the Scottish referendum, scheduled for 18 September which has raised many questions regarding monetary policy affecting the pound – the pro-independence camp are arguing for a currency union to remain with what would be left of the UK – England, Wales and Northern Ireland – while those against independence say this will not be workable. In Spain there is a call to hold a referendum on Catalonian independence on 9 November, which, in contrast to the Scottish referendum, had not at the time of writing been accepted as a valid exercise in democracy by either Spain’s central government or the country’s Constitutional Court.
Maria Paola Toschi, executive director and Global Market strategist at JP Morgan Asset Management, and her colleague Kerry Craig, vice president and Global Market strategist, earlier in 2014 noted the danger in so-called ‘austerity fatigue’ experienced in a number of European countries.
This has led to concern of a rise in populist policies.
“Heavy-handed austerity has helped to reduce deficit-to-GDP ratios, but often at the expense of economic growth and heightened social tensions.
“Thankfully, there will be somewhat less austerity in the coming years, but European politicians must work to overcome continued divergence in policies and the performance of economies within the single currency area if they are going to create a more favourable environment for sustainable growth,” Toschi and Craig wrote.
They added: “Voter interest in EU politics has waned over time, but this year’s election could see an increase in voters who want a less integrated Europe and to protect national sovereignty.”
“Eurosceptic parties could gain up to 25% of the vote in the European Parliament elections.”
One of the prime movers of both upside and downside risk associated with politics is the internet. Consider, for example, how Turkey’s government moved to ban the social networking service Twitter at the time of local elections in the country earlier this year. The attempt backfired as the country’s Constitutional Court rejected the move.
It showed the importance of new information technology involved in the dissemination of ideas ahead of or during elections. The bar chart shows how internet usage has changed in a number of countries affected by higher political risk – regardless of whether the incumbents have won in elections that have already taken place this year, or are set to take place later in the year.
Use of social networking has been proposed as being of benefit to investors in that it could reduce the risk of speculative panic affecting markets, or indeed attitudes towards products.
Tundra Fonder – the Swedish manager whose Russia fund returned more than peers available on the PPM platform for long term savings through the last quarter of 2013 – has been providing running commentary on the situation in
Ukraine, Crimea and Russia via its Facebook page since those particular events moved up the agenda in light of the referendum and subsequent annexation of the territory into Russia.
What is less certain for investors is understanding the impact of this type of use of IT in a way that means it can be plugged into modelling. One fund buyer who is already looking to try to imply a certain measure from the way factors such as elections are addressed by IT is Swedish manager Aktiva Fonder Asset Management.
Christer Hultblad, CEO and portfolio manager, says that the manager uses different Big Data tools for sentiment analysis in the investment process.
An example would be “Putin”. The screening does not look at how many times “Putin” is mentioned online, but seeks to contextualise this. The screening enabled Aktiva to see a spike before the Crimea crisis worsened, Hultblad says, adding: “We see a new status quo appearing, but things will normalise – the world is globalising and countries cannot lock each other out.”
“The West did not believe the world police would be in the east rather than in the west, so it was unprepared for the Russian response.”