Political risk premium soars
Before the credit crunch and Great Recession of 2007-8, the great cliche of my milieu was that the power of national governments and politicians was being eroded by globalisation and the clout of those running big multinational companies and financial institutions.
It was a trend. But that trend no longer looks quite as significant as it did.
How so? Well, I can barely remember a time when there have been more enormous stories in my patch, and all of them have at their very heart the actions or reactions of the political elite. Right now, elected politicians look like giants endowed with great strength – which doesn’t mean they use that strength responsibly – up against pygmy-ish corporate bosses.
Here is a short, non-comprehensive list of what I am on about:
(1) The most interesting announcements on this morning’s London Stock Exchange are the squeals of pain from BHP Billiton and Xstrata, which have laid into the Australian government’s weekend announcement of a new 40% tax on the substantial profits earned from mineral and resource extraction in Australia. The Australian government wants the multi-billion dollar tax proceeds to finance tax cuts for other businesses, whose aim is to make corporate contributions into pension schemes more affordable. The fall in the share prices of BHP, Xstrata and Rio Tinto reverberates around the world, and especially in the UK where they represent a significant slug of the overall value of the stock market.
(2) Much of the recent drop in BP’s share price is the result of uncertainty about the damage to the company’s prospects in the US that may result from how politicians and regulators react to the calamitous leak from its oil platform in the Gulf of Mexico. Petroleum is always a political business. But it has become more political than ever, as the environmental risks of its extraction are perceived to have increased in so many different ways.
(3) The fraud charge levelled by the Securities and Exchange Commission against Goldman Sachs is the most visible manifestation of a global trend of financial regulators attempting to tell banks who has the whip hand.
(4) All banks face material uncertainties about future actions by governments and regulators, which will determine what new taxes they may face, what activities they may be forced to withdraw from, how they pay their executives, what stocks of capital and liquid assets they’ll be forced to hold, and so on.
(5) Then, of course, there’s that refusal by European regulators and governments to trust the judgement of airlines that it was safe to fly around the ash cloud.
(6) Oh, and let’s not forget about Greece. There have been months of uncertainty about whether the European Union would bail it out and whether the European Central Bank would continue to provide Greek banks with liquidity against the collateral of downgraded Greek state debt. The rescue of Greece shows both the extent and limitations of public-sector power: it will be some time before we can gauge the true consequences of the significant bailout package, for Greece and for the integrity of the eurozone and European Union.
What do all these stories have in common? Well they all show the extent to which market mechanisms are no longer trusted to sort out societies’ assorted challenges and problems – which was a predictable consequence of the Great Recession, but has happened to an extent that may surprise even those who believe in big government.
So any investor has to think very hard indeed when putting money into a business about whether that business is likely to rub up against government in a way that is likely to diminish or – perhaps more rarely these days – enhance value.
Oh, and let’s not forget that the outcome of an election taking place in a country called the UK will have big and difficult-to-measure consequences for the private sector.
Or, to put it another way: the political component in the risk premium of investing has soared – though the preponderance of cheap money (another manifestation of state power) may have clouded investors’ judgement about the long-term implications and costs of the re-born state.
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