Expert Zone

Straight from the Specialists

Decoding political risk no mean feat


(The views expressed in this column are the author’s own and do not represent those of Reuters)

Politics is playing a dominant role in financial markets today — and generally speaking, investors do not like it. Political risk is an additional layer of uncertainty that has to be factored in while making investment decisions. Because political risk is intimately linked with the uncertainties of human behaviour, the impact of political risk can at times seem to be almost random. After over two decades as a professional economist, I can assert that forecasting economies is tough. Trying to forecast what politicians are going to do is even worse.

Consider how politics in one part of the world can have repercussions on the other side of the globe. Chinese politics has impacted the most unusual areas this year. China as a country is relatively poor. China is also a society that is relatively unequal in terms of its income distribution. Estimates put the number of Chinese millionaires at around 1.4 million, the second highest number in the world — which means that the Chinese market for luxury brands is important. Or rather, it was.

The politics surrounding the Bo Xilai affair has led to a change of policy in China. The Xinhua news agency reports there are new rules restricting official spending on vehicles, overseas trips and other areas that might be termed “luxury spending”. Associated with that, the practice of gift giving has declined. The result is a poor outlook for luxury brand sales in China at the moment, arising from local political pressures. Investors who thought luxury good producers would benefit from the nouveau riche of China are now likely to be disappointed, and it is all due to politics.

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