When putting money to work in emerging and frontier markets,
investors have always had to assess the risks of shifting
political winds. Now, according to financial executives,
investors in developed markets are having to perform a similar
analysis as well.
Karen McQuiston, head of institutional advisory and
solutions at PGIM, the investment management business of
Prudential Financial, says recent election surprises, including
Donald Trumps 2016
presidential win in the U.S., have made political risk
more relevant for certain institutional
What matters is the feedback from political risk to
underlying economic and market conditions, she says.
Its one thing to have a political regime you may or
may not agree with. But what really matters is if there is a
framework around it, so you can predict policy outcomes,
McQuiston adds. We may be in a place that we cant
predict what will happen in the U.S.
Ellen Ellison, chief investment officer of the University of
Illinois Foundation, observes that this phenomenon applies to
other developed markets as well, between the U.K.s shock
decision to leave the European Union and the emergence of
far-right presidential candidates such as Marine Le Pen in
France. Le Pen
reportedly talked of implementing measures to prevent a run
on the banks if she won, but her opponent, Emmanuel
Macron, easily defeated her in a runoff election on Sunday.
Political risk has become more of a developed-market
phenomenon, she says. Think of Brexit. Thats
Of course, those who are willing to invest amid uncertainty
can also benefit. Ellison says the foundations analysts
in the U.K. are evaluating the potential increase in exports.
You can view political risk from the other side of the
coin. Dislocations create opportunities, Ellison
Alyssa Rieder, chief investment officer of not-for-profit
hospital operator Dignity Health, says that in response to the
macro environment, she has decreased the foundations
exposure to traditional fixed-income and public equities and
increased the portfolios allocation to hedge funds as
well as private equity. The foundation has allocated money to
global macro hedge funds over the past year because Rieder
perceives there are both risks and opportunities in the new
political climate. Were hiring folks who can think
about those risks, she says.
PGIMs McQuiston agrees with Rieder in that many
institutional investors are depending on their managers to help
them navigate increased risks. Active equity managers are
closely evaluating which companies will be winners and losers,
fixed-income managers are looking at the effects of trade
policies on sovereign debt, and hedge funds may play currencies
or make macro bets, she says.
Financial technology may be helpful when it comes to
political risks, says Marina Gross, executive vice president of
the portfolio research and consulting group at Natixis Global
Asset Management. Gross says there are a number of analytical
tools to help measure unusual risks as well as to better
understand a portfolios currency and liquidity risks in
different scenarios. But she cautions that its difficult
to model political risk. There are many blind
spots, she says.
Still, shes not that worried. Trump is
bombastic, but at the end of the day the system works. I
dont think there is heightened political risk in the
U.S. She points to Brexit: after the news, there was a
small blip of volatility at first, but then the markets