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Economists...
might as well start reading tea leaves

The Unexpected Result

The unexpected result of the Brexit vote and now this week's
judgement on the Government's ability to trigger article 50 are
just perfect examples of 'political risk'. When we talk to potential new investors, Wealth Managers will highly the characteristics of fixed interest, equity and property investments. We may even talk about the risk associated with inflation, the effects of bad company management and market based risk.

One risk that is less frequently discussed is 'Political Risk', the effect of decisions made by politicians. Under ' normal' circumstances you would expect political risk to be more associated with emerging market investments. Investing in far-flung shores adds a number of risks including currency fluctuations, accounting standards and whether the people that are selling the assets actually own the assets they are offering for sale. Political risk is used to represent the risk that a tin-pot government might be subject to a coup or unexpectedly change the rules.

Oil Exporers

Oil explorers take enormous risk by investing capital in African or places like Kazakhstan on the basis that the rules at the time of making the investment are still in place and the government remains supportive when the oil starts to flow. During the summer, we witnessed a very British bloodless coup, no-one stormed the Houses of Parliament, but a new government was created with very different objectives to that of David Cameron's.

 

The Bank of England has acted to lower interest rates and the economic statistics are very encouraging overall. What is becoming less clear are the actions of politicians. In fact, these are becoming increasingly erratic and unpredictable. Economists like to try and model the outlook for the UK. These forecasts rely on a series of events/predictions to happen in sequence, not unlike an accumulator bet at the bookies.

Equity markets, employment and GDP growth

From what we have seen most economists managed to correctly predict that Sterling would fall, after that they failed to anticipate the movement in the equity markets, employment and GDP growth in the short term. The effect of the political risk in the UK becoming like that of emerging market economies makes it likely that their long forecasts are even less accurate.

This week's events prove how unpredictable near future is and although we have taken some action as investing overseas has become more expensive due to the current price of sterling, maintaining a well diversified portfolio is essential especially with an increase in inflation expected over the next year.

At times like these many wealth managers offer free reviews for those checking to see if their savings, investments and/or pensions are performing as expected.

 
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