Bulls n' Bears

Political Risks in Investment

When considering investing, overseas emerging markets might offer attractive returns, especially when the returns available in some of the major economies are considered.

However, returns are related to risks which means that the highest available returns also carry the largest risks. And, although this risk is also present in domestic and developed markets, great deal of political risk is involved when considering such investments.

What frequently happens is that controversial political moves in a country which would make investment there undesirable are also accompanied by the blocking of transfers of money out of the country, effectively trapping investment money. These unfavorable moves can then trigger a worsening spiral in exchange rates  and the overall picture for money invested there can become very grim. In many countries there is a move to require at least 51% local ownership in major enterprises.

This means that many companies have to simultaneously seek investment from a limited pool of local investment funds and results in the forced sale of a substantial portion of the business at very unfavorable prices. Companies that have a large presence in such countries, although they may be achieving good returns, therefore carry very large question marks.

Strangely, it is often countries which should be trying to encourage investment which introduce these draconian measures for internal political reasons. When investment dries up as a result and the economic situation gets worse then fingers are pointed at the greed of foreign capitalists. Many of these countries have an attitude of entitlement, not realizing they need to provide an economic climate which will encourage investment in order to reap the benefits.

Zimbabwe is a case in point. South Africa may be at the start of a similar process, with calls for nationalization being made. Although the calls are being resisted, this is an experiment that many countries try to their detriments. The assumption being that a government which is not running a country well can make a better job of running local industries than incumbent managements. As far as I know, this has never happened - nationalization is a disastrous policy.

If you wish to take advantage of the good rates offered in such countries, the solution is to keep the investments liquid and to move your funds out at the first sign of impending political upheaval. The BRICS (Brazil. Russia, India, China, South Africa) probably offer the best opportunities, with rapid development allied to reasonably stable politics.