It’s easy to say investors should focus on fundamentals but this risk can have a significant and lasting impact
Political risk is a factor that is hard to judge. There are countless examples of apparently solid investments which have gone bust because of unforeseen or mis-assessed political risks. Going forward, this could be a very serious factor for the global economy through 2016.
Political risk, region by region, is high at the moment. From an Indian perspective, domestic political risks are high and only some of these are being discounted. First, the long-awaited Goods & Services Tax (GST) is very unlikely to go through within this Lok Sabha term.
Parliament remains in logjam and GST must be passed in both Houses separately. It is a constitutional Bill, affecting Centre-state relations. The ruling Bharatiya Janata Party (BJP) does not have the numbers in the Rajya Sabha.
GST implementation would be chaotic for about a year. It would also be an embarrassment for the government if it did pass the Bill late into this Lok Sabha term. The Centre would either have to find excuses to delay implementation or risk going into a general election with fiscal turmoil.
The practical deadline for GST passage would be September-October 2016. It is very hard to see how that can be met. So, we might as well write off GST as unlikely to happen until after 2019, if at all. Ditto for meaningful land reforms or labour law reforms. Those expectations are now being shelved. Whatever the official stance may be, sensible analysts would assume that the economy will have to chug along without those changes.
Beyond this, there are a string of assembly elections taking place in the next couple of years before the General Election of 2019. This could mean violence flaring up all over the place. That would be bad for business. There is also the chance, call it the certainty, that more scams will surface as the political temperature rises. That could vitiate the investment atmosphere.
Beyond India, there are potential political risks that could affect the global economy, brewing in Brazil, in the United Kingdom, in West Asia and North Africa, in Russia and in China. In Brazil, economic weakness is being compounded by impeachment of the President.
Though India has no direct concerns, Brazil is big enough to shake global markets and destroy the investment climate for all BRICS nations. The UK will have its referendum for Brexit and growth is also low there at the moment.
Wars in West Asia and North Africa have an obvious bearing on energy prices. Apart from that, the Syrian refugee crisis is causing turmoil across Europe. Russia is in economic crisis due to low energy prices. Aggressive actions in the Ukraine and in Syria have also put Russia at loggerheads with the European Union.
In China, the government has taken a string of confusing policy decisions to accelerate growth. Debt has exploded as public sector banks have been told to open the tap. There are huge risks of bubbles popping.
These are the known unknowns. They are acknowledged risks but probability and possible impacts are hard to assess. There are many other risks which the market has not yet acknowledged, let alone assessed.
One such risk is a terrorist attack on a large population centre in the First World that causes large-scale loss of life. When 9/11 happened, the global economy was in reasonable shape and even so, the assault and its aftermath knocked markets into a tailspin. A similar incident now would probably have much worse consequences.
A second risk is more mundane. But it is coming closer and closer to fruition. There is an American presidential election in the offing. The US President has the power to take executive decisions that could make or break the global economy, quite apart from causing damage to the US itself.
The two presidential likely candidates are both being treated with deep suspicion by big business. Donald Trump is a policy unknown and he has said many contradictory and outrightly bizarre things during his campaign. His likely policy stances are a big question mark. Hillary Clinton is better understood but her public record and some of her policy stances make people nervous.
It is all very well to say investors should focus on fundamentals and ignore political risks. Unfortunately, the risks outlined above could all have a significant and lasting impact on fundamentals.