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How to invest in times of political change

Aug 16 2017 22:00

Cape Town - In South Africa, we have no shortage of political stories making the headlines on a regular basis, but there have also been some unexpected changes on the global stage of late, according to Andrew Howard, head of sustainable research at global investment manager Schroders.

"Rank outsiders overturning the odds have become so normal that global equity markets have learnt to brace for impact and as a result, those impacts have become more muted," explains Howard.
 
“Political leaders and commentators appear to have accepted that old rules may not hold even if there is little clarity on what the new rules are."

He believes the changing global political backdrop is a critical consideration for investors.
 
“Governments are important stakeholders to companies in all sectors. Understanding how their priorities are changing and the implications for future profitability is an important part of our analysis of corporate sustainability,” says Howard.
 
In his view, investors are better served by focusing on the structural lessons hiding beneath the headlines, sound bites and policy aspirations, rather than chasing news flow.

READ: How to boost your investments in 2017

Schroders has identified three key shifts in the political landscape that will it expects to outlast "the next election cycle or today’s political personalities":
 
Fragmented electorate concerns and political instability

The combination of increased voter discontent and the faster speed with which power moves between parties and leaders creates an increasingly fluid, unstable political environment.

The result is an increasingly fragmented political environment, spanning a wider range of issues, in which power can migrate quickly from one group to another.
 
Economic challenges continue to build

According to Howard, balancing the public sector’s books is a key part of government’s job description and doing so is becoming harder as growth slows, populations age, welfare burdens rise and tax planning becomes more creative.

“Tax cuts and spending programmes may play well in focus groups, but in the long term we are likely to see less of either. Over time, a transfer of costs from public to private accounts appears inevitable,” he says.
 
Divergence in business vs political interests

Howard points out that since the financial crisis, a business-friendly political backdrop has given way to tensions as social priorities have changed.

READ: How SA can get back to investment grade

Implications for investing in a time of political change

The political shifts unfolding around the world will have significant ramifications for global companies and their investors.

Howard outlines four of those implications:
 
Currying political favour will become less rewarding

“Political capital may become more of a liability as scepticism of the corporate sector grows, consumers’ political views become more disparate and political leadership becomes more fluid,” he says.
 
Although lobbying spending is typically a small proportion of profits, Howard believes some industries and companies have established strong relationships and influenced policies in their favour.

“The tailwinds those efforts brought may become headwinds going forward,” he says.

Adaptability will be key

According to Howard, a more fluid political backdrop raises the importance of adaptability over specific plans.

“Grounding strategic and investment goals in a specific vision of the world, however well thought-through, is less useful than ensuring business models are flexible to the changes that inevitably lie ahead,” he explains.
 
“To gauge corporate adaptability, the chart below compares the proportions of sales companies generate from product segments which existed in their business five years earlier," he says.

"On average, companies in every industry generate more than three quarters of their sales from well-established business units, but there are sizeable differences across sectors.”

READ: Black-owned healthcare investment company lists on JSE

Global business models under threat

Howard highlights that globalisation lies at the root of many of the issues that top voters’ concerns.

“Opening economies to global trade, capital and migration puts unskilled workers into competition with cheaper labour in emerging economies, cedes policy control to market forces and raises immigration pressures,” he says.
 
“The net result for economic growth is invariably positive but with the benefits unevenly concentrated in a minority of the population, democratic politics create a brake to globalisation when too large a share of the population ceases to benefit.”

Howard believes those industries whose customers are most global, or rely on global supply chains, are likely to be most threatened by moves toward more protectionist attitudes and policies.

Long term government spending and tax pressures

According to Howard, the need to balance their books eventually creates a constraint within which all governments need to operate.

“Across major advanced economies, only Korea and Germany are running government surpluses while six of the G7 countries continue to operate with unsustainable deficits even after years of austerity measures,” he says.

In his view, a rise in taxation, cuts in government spending or a combination of both are an inevitable feature of future budgets, whatever political party is in power.

“Those paying the lowest tax rates face the greatest risks of cost increases, whereas those most reliant on government spending are at the greatest risk of growth pressures,” he says.

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investments  |  politics  |  money

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