Date: 13.03.17 Category: Working For Change
In this roundtable, originally published in CFA UK’s magazine Professional Investor (PI), we continue the discussion on the subject of political risk. You can read the previous questions of the interview here.
PI: There has been a rise of different populist movements, both on the left, and on the right, in many countries, and sometimes simultaneously. Does that make it harder to predict what will happen in the future?
Eoin Murray: The rise of populist movements on both the right and left of the political spectrum seems to principally represent an expression of anti-establishment sentiment – while being relatively easy to identify what these groups are against, it is considerably harder to ascertain what they are in favour of. Inevitably any increase in risk, whatever aspect, makes it harder to predict what will happen in the future, but as long as we steer clear of complacency, there is no reason that it should become harder to navigate the financial markets.
Thomas Schäubli: No. In a way, it makes it much easier. Populism is about offering simple solutions to complex problems. And it is about communicating these simple solutions in very clear language. For these reasons, the positions of populist parties are often much clearer than the ones from more established parties. And both populist and non-populist parties have a tendency to divert from their initial positions over time and especially once in power. It’s not predictability that causes our concerns with populist parties, but their policies, which are often growth – and market-unfriendly. And of course, what goes along with the rise of populist movements is a shake-up of established party systems, often causing uncertainty.
Jason Voss: I believe it does make it harder to forecast the future. Notice that I changed the word in the question from ‘predict’ to ‘forecast.’ This is because I think forecasting a single point outcome is always difficult when intense forces compete to shape futures and leads to volatility. However, I am a huge fan of scenario planning, which is about constructing multiple, very different, narratives about the future. Once scenarios are constructed investors seek to identify strategies that perform well in all future scenarios. Many people confuse a ‘most likely,’ an ‘outperform,’ and an ‘underperform’ series of forecasts combined with a weighted average probability, with scenario planning. Definitively, this is just more complex forecasting. In scenario planning each narrative is very different from the other. For example, one scenario may identify populism and its effect on investment returns. Whereas another scenario identifies as the main driver of economic activity the greater interconnection of the world via social media leading to a permanent lowering of the cost of innovation.
Wayne Bowers: The rise of populist politics adds a new dynamic that needs to be seriously incorporated into various scenario planning and potential effects this may have on country, business, consumer, environments need to be considered. The constitution and democratic process of various countries also needs to be understood to better assess the influence populist politics may have on a governing parliament (eg majority versus coalition). The ability for countries to accept and move on with appropriate governance versus a stalemate within the legislature bodies are two examples at either end of this spectrum.
Philip Chandler: The future has always been difficult to predict and investors have always been bad at predicting it! But the polarisation of politics certainly doesn’t help: first, it’s hard to call which way people will vote on emotive issues, and, secondly, with diverging outcomes you can’t take an average and position for it.