Recent years saw the return of political risk in developed countries, affecting issues such as tax, spending, foreign policy, security, regulation and trade. Citi's Tina Fordham argues that such risk must now be part of any private banker's conversation with clients.

Back in the late 1990s, when the-then US President, Bill Clinton, said the “era of Big Government is over”, it was a comment made when economic and political liberalism was ascendant. The stock market boomed, the Soviet Union was put on the ash-heap of history and young people were more interested in the Web than protest.

Much has changed since then. This is not simply because of the 9/11 attacks on New York and Washington DC, although those attacks, and conflict in the Middle East, certainly increased tensions across the board. Political risk – defined by growing uncertainties about the outcomes of elections and policies, as well as rising taxes and regulations – is back for many reasons. And this time, developed countries rather than emerging market nations are in the limelight.

So argues Citi senior political analyst Tina Fordham. She joined Citi in 2003 and once worked as an adviser in the UK prime minister's office. Based in London and a native of northern California, she has recently been busy producing reports for advisors and clients about issues such as the prospects of heavy losses for the ruling Democrats in the mid-term US elections; political woes in Greece and coalition government marriage pains in the UK. And although other bank analysts keep an eye on the political climate, she says her bank is almost unique in providing wealthy clients with dedicated, in-house analysis and commentary on political risks – and opportunities.

For the end-client, political risk analysis is valuable because an understanding of what is happening is essential for wealthy individuals considering how to advance their business interests and investments, she told WealthBriefing recently at her firm’s offices in London’s Canary Wharf. She pointed out, for example, that such risks are particularly relevant to clients with assets in different countries, as is often the case.

“In a time when political risk and uncertainty has returned to markets in a way in which most people haven’t seen for a lifetime, it is a no-brainer to offer this [analysis] to clients as part of our overall offering,” Fordham said.

“I started to do this over a decade ago. Around that time, just before 9/11, I was mainly advising clients in the developed world about political risk in emerging markets,” she said.

“Now, it is really different; just in the last year I have briefed Asian clients about US politics, US clients about the European sovereign debt crisis; Latin American clients about Russia. The flows of interest on political developments are now worldwide and between both the developed and developing world, rather than one-way as in the past. That is telling.”

Fordham produces analysis for clients on an event-driven basis, typically once or twice a month and also produces reports depending on specific events as and when they arise. Additionally, she is a featured speaker at client events, currently assessing the post-crisis landscape through her recent paper, entitled, The Politics of the New Abnormal.

Clients are eager to hear what she has to say. During some of the most acute phases of the global financial turmoil, Fordham visited more than 20 countries talking with investors and corporate leaders on how developments were likely to play out. And she is involved in such forums as Chatham House and the World Economic Forum. She was recently nominated to the Aspen Institute Socrates Society for Young Leaders.

So far, few other private banks have produced an equivalent of Fordham. Occasionally, other firms have drawn attention to politics as a risk factor. In the case of UBS, it recently reminded clients to remember geopolitical factors in investment. Analysts will mention elections and events such as budgets in their notes, but this tends to be subsumed inside economic commentaries, rather than as a stand-alone topic.

Opportunities

What clients will get from Fordham is not direct investment advice, but a greater appreciation of the forces at work that can affect the business and investment decisions they have to make, she said.

“This is about a triangulation between politics, economics and markets. [Client reaction] has been very positive. What I am able to do is that I am not just talking about changing elections but about changing socio-political and other trends,” she continued.

It would be a great error to treat political analysis as simply about laying out various risks in some negative way, she said. Analysis can also unearth lucrative opportunities for clients.

“It is not my job to scare people but to show a balanced view of risks and opportunities to help them make informed decisions. Political analysis is fast becoming part of the conversation between wealth advisors and clients.”

“Having all this input [of political risk analysis] from an in-house source raises the overall quality and completeness of the advice we provide. It emphasises also the global nature of our reach,” she said.

New abnormal

A key switch since the 1990s is that political risk is often more of an issue in developed than emerging market nations.

“A lot of emerging market countries are led by people winning elections by wide margins and maintaining high approval ratings for longer; that is a great amount of political capital and makes such leaders the envy of their developed world counterparts,” said Fordham.

Political risk is rising for various reason in the post-crisis environment:

- Greater government intervention in and control over the economy and markets, which makes it more necessary to track what leaders and policymakers say and what they can actually implement;

- Currency conflicts, such as between China and the US;

- Greater polarisation in US and European politics and society, (as evidence, the Tea Party movement highlighting anti-establishment sentiment in the US and right-wing and populist parties in Europe in part responding to concerns over immigration and disgust with politicians in general);

- The credit crunch, which has damaged the “Washington consensus” on free markets, a declining consensus on free trade and globalisation as positive trends, and a decline in multi-lateral co-operation.

If heightened political risks remain, one can expect other private banks to provide more analysis of the issue. Like it or not, rising government intervention, G20 attacks on so-called tax havens and political polarisation is making political risk a factor which high net worth clients need to factor into their decisions. A whole generation of investors who did not experience the inflation-hit 1970s and often tumultuous 1980s have found recent events to be a nasty shock. It may be some time before the “great moderation” enjoyed by Clinton and his contemporaries returns.