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POLITICAL RISK: CAN BUSINESS RISE ABOVE THE TENSIONS?

by Mufid Sukkar, Chief Strategy Officer at Nest Investments

We are in the midst of the most unpredictable era of global politics in recent decades.

Mufid Sukkar, Chief Strategy Officer at Nest Investments
Mufid Sukkar, Chief Strategy Officer at Nest Investments

The path to globalisation is considerably less clear than even a year ago, with an unprecedented rise in inward looking nationalist parties and decision-makers all over the world. From the rise of Marie Le Pen, which almost took her to the French Presidency,to Brexit, to President Trump – there has been a significant rejection of the status quo.

It is difficult to define the ‘new’ world order; with foreign policy decisions of world leaders often surprising the pollsters and academics alike. A clear example of this is President Trump’s recent announcement of the US withdrawal from the Paris Accord, as well as his recent comments casting doubts over the USA’s commitment to NATO. These actions make it clear that the President is no longer committed to the multilateral agreements that were once a cornerstone to the USA’s post-WW2 world order. This unconventional approach may signal a return to the reliance on bilateral agreements and alliances, leaving political decision makers with the power to negotiate and make deals on their own terms.

This uncertainty is by no means a reason to despair. When the US elections results were declared, markets across the world went into freefall because of Trump’s uncertain policy intentions. However, since then, the stock markets across the USA, the EU and the rest of the world have rallied significantly. President Trump’s pro-growth stance has in fact seen a 6.12% increase in the Dow Jones Industrial Average over the first 100 days of his presidency.

It may seem as though the growing unpredictability, and to some, instability, of global politics is something to fear.However, businesses should instead be prepared to adapt to new realities to benefit from political upheaval and an ever-changing political system.

Businesses must look for ways to mitigate the strategic and political risks that will affect their operations. There are a few ways to approach this in practice:

  1. Monitor developments:

To effectively plan long-term strategy, businesses must be aware of potential risk scenarios, and how they could be affected in the future. This includes an ability to analyse the real business implications of national or global events. It is also essential for businesses to consult with specialists and analysts regularly. Specialist consultancies regularly produce highly specific, cutting-edge reports on the political landscape and the impact across global economies. It is important to fully understand both the effects of microeconomics (affecting specific projects or industries) and macroeconomics (affecting the entire economy).

  1. Stay Calm:

Rapidly changing situations, whether they be political or economic, can result in a change in opportunities or circumstances for a business. To effectively deal with the situation, it is worth taking the time to explore possibilities rather than engaging in a knee-jerk reaction and implementing a crisis plan which may not be suitable for the circumstance. By taking the time to assess all the options, businesses may in fact find that new opportunities have presented themselves.

  1. Adapt to the situation:

The decision by the British public to leave the EU was one that was met with shock and disappointment by some, viewing it as a return to isolationism and a need for absolute state autonomy. However, in its place, UK foreign policy is focussing on bilateral relations; fostering stronger economic and diplomatic ties in new areas and providing access to new and profitable markets. With adequate foresight, it is possible to adapt your business to new realities to benefit from a political upheaval rather than suffer from them.

  1. Minimize fixed investments:

Organisations may know the benefits of diversifying their strategic business components across the region but do they always know the potential costs? Political risk is always relative to the amount of capital at risk in each market. It is possible to mitigate risk by limiting costs such as leasing facilities instead of buying. Ensuring funds are kept with reputable banks with a high solvency margin and reduced exposure to property lending are also key steps to take.

Small changes in the political environment can result in huge financial implications; with many concerned that the current trend of lending on property could result in a repeat of the 2008 banking crisis. The risk of this is heightened by the fact that many central banks are printing money to keep the stock markets artificially high. When this stops, and interest rates rise, the ‘bubble’ is even more likely to burst. However, with prudent investment in stock markets, and careful thought behind the choice of your bank, the implications of financial risk can be mitigated and reduced.

  1. Ensure to Insure

Insurance can often be a powerful and reassuring way to mitigate political risk – but can often come with a large premium cost, therefore may only be available to larger businesses. As this can be beyond the reach of some businesses, insurance is best used in combination with other more proactive political risk management strategies such as those cited above.

  1. Banks since 2008 have been lending on property and everyone believes the bubble is just to burst with another bank ing crisis
  2. Also since 2008 all major currency Central Banks (USD,£ and Euro ) have been printing money which has not been used to stimulate the economy but ending in stock markets which are artificially high. Once the quantitative easing stops and interest rates rise this bubble will also burst.

Hence make sure your funds all kept with reputable banks that have high solvency margin and less exposure to property lending as well as prudent investment in Stock markets.

To conclude – the current political environment can only be defined by its unpredictable and constantly changing nature; an economic environment which undoubtedly carries a large amount of political risk. With all this in mind, businesses must prove adaptable in the face of global change and use a combination of measures to mitigate risk and keep the business viable.