Investors beware: Politics is driving how firms are run
AS INVESTORS, we need to be aware about how what is happening around them shapes and influences our investments. And right now that means keeping a close eye on politics.What’s more, it is worth bearing in mind that macro-environmental influences are dynamic. A political decision that may not have an immediate impact could have a bearing on a business later on.
In the main, there are four environmental factors that need careful consideration: political, economic, social and technological pressures. But of the four environmental factors, political changes are currently having the most sway on businesses. In a nutshell, politics relates to the degree of influence governments can have on the running of businesses. This contrasts with predominantly laissez faire economies in which companies can largely operate as they wish.
A hands-off attitude to business explains why many financial institutions favour more politically-indifferent countries, such as Singapore and Hong Kong. Banks that operate there are not burdened by onerous, politically-motivated initiatives that dictate how much they can lend or borrow. Of course, laissez faire cuts both ways. Any bank that finds itself in trouble is much less likely to be bailed out.
Political factors can, and often do, affect tax policies. Sticking with banks, proposals to increase levies on banks to replenish depleting European public coffers could have an adverse impact on Europe’s financial sector. Recently, European Central Bank president Mario Draghi warned Europe’s leaders to resist the temptation of going down the easier route of raiding banks’ reserves. Although Draghi was reluctant to discuss the politics of specific countries, his words may be seen as a veiled warning for France’s new President Francois Hollande.
Consider something as simple as interest rates. The cost of borrowing, which is decided by central banks, has traditionally been set at levels that would bear down on the rate of inflation. Therefore, conventional wisdom would suggest that bank base rates should in theory be higher than the rate of inflation if governments are intent on controlling rising prices. However, politics has seeped into economic decision making. Politics has gained the upper hand over economic prudence in debt-ridden western economies.
Investors need to be continually aware of how politics can affect their business investments. Politicians aren’t always open and transparent about their intentions, which is why it is important to regularly audit how businesses are likely to react to various political scenarios. Some people may call it top-down investing. I call it common sense investing. As investors we may not be able to control what politicians do, but we can decide how we wish to capitalise on what they do decide to do.
David Kuo is a director at The Motley Fool. He’s speaking on politics and trading at Morning Wire’s Active Trader event on 24 May: www.cityamactivetrader.com