Standard Life Investments has added a process for examining political risk to the work it does around understanding markets, citing the spread of such risk from emerging into developed markets in the wake of the global financial crisis.
The process, which it has brought in house, seeks to categorise risks as either institutional or cyclical, before identifying them as precise factors posing a risk to investments.
An example of a cyclical risk is electinos in developed markets, and specific related factors would include populasm – the rise of anti-establishment parties and policies – fragmentation – of the political system, for example as seen in Spain – and polarisation – representing a harderning of ideological divisions between parties, for example as seen in the US.
“By understanding how politics and policy measures are intertwined, we can test the likely effects of political events on investments,” SLI said.
Stephanie Kelly, political economist at Standard Life Investments, added: “Given that policy uncertainty has a tangible effect on economic and market indicators in developed markets, understanding the political dynamics and structures that drive this uncertainty is crucial.”
SLI’s move to add political analysis reflects work that has been done by other managers, such as Nikko AM.
Last year it partnered with Eurasia Group, to access the latter’s proprietary geopolitical risk indicators and apply them to Nikko AM’s multi-asset investment management process. The two then said that the partnership would offer global investors a risk-controlled means of gaining exposure to emerging markets. (http://www.investmenteurope.net/whitepaper/nikko-am-and-eurasia-group-on-political-risk/ )