Among the many factors that can affect market performance, political events are perhaps the most difficult to predict, but they frequently have significant implications for investment decisions. Financial markets generally abhor political instability. At the same time, a thorough analysis of political forces at work may uncover unanticipated opportunities or avoidable risks. Show
What is political risk?Political risk – sometimes known as geopolitical risk – is the risk that political decisions, changes or disruptions may have a meaningful impact on the performance of a company or government. Political risk is not restricted to country-level incidents, but rather can encompass local, national, regional and global events. Political risk can come from any number of sources, such as:
Political events or sudden policy shifts can disrupt a company’s ability to execute strategy and deliver products or services. In turn, this can affect company performance and profitability. The effects can be negative or positive. For example: A change in a country’s tax structure, minimum wage or regulatory requirements could raise costs and, depending on a company’s ability to pass those higher costs on to consumers, have an unanticipated impact on earnings. Or a shift in trade laws for a particular industry – such as the liberalisation of trade restrictions on the export of U.S. oil and gas – could result in potential opportunities to expand trade with overseas business partners. In other words, political risk and instability can influence trade with other countries. It may deter foreign investors from wanting to invest in the debt and equity securities offered by companies or government entities based in the region. Or it may portend an opening of new markets. How are financial markets affected?Like any other form of market risk, political risk has the potential to influence the performance of individual securities as well as the market more broadly. For equity markets, political risk could cause the share price of a company to decline significantly. For example, an unexpected decision by a government to change the privatisation laws of a particular industry could cause companies in that sector to be hit substantially. Download an infographic summary of the 5 things you need to know about markets. View infographic Meanwhile, broader political instability or changes – perhaps due to an unwelcome or controversial change of government – could generate concern among investors and cause a broader market decline. For fixed income markets, political risk can create problems for both corporate bonds and government bonds. For companies, a decline in performance or profitability resulting from political risk could leave a company unable to pay its debt obligations and hence, increases the risk of default. For government bonds, increased political risk can push bond yields up as investors demand higher returns as compensation. Historically, this has been more of a problem in developing nations, where the risk of default or debt restructuring may be higher, although events of the past few years (Brexit, Italy’s constitutional referendum) have demonstrated that political risk is a crucial factor for developed economies as well. How is political risk measured?Political risk can be very hard to quantify because of limited availability of data and case studies. Nevertheless, PIMCO believes it is an extremely important risk to assess, especially when investing in foreign countries, and includes an evaluation of key political risk factors as part of its quarterly cyclical and secular outlooks. Some risk analysis firms, such as Eurasia Group and the PRS Group, model political risk and produce political risk indices. Available online, these resources can help guide investment decisions. Get help with accessInstitutional accessAccess to content on Oxford Academic is often provided through institutional subscriptions and purchases. If you are a member of an institution with an active account, you may be able to access content in one of the following ways: IP based accessTypically, access is provided across an institutional network to a range of IP addresses. This authentication occurs automatically, and it is not possible to sign out of an IP authenticated account. Sign in through your institutionChoose this option to get remote access when outside your institution. Shibboleth / Open Athens technology is used to provide single sign-on between your institution’s website and Oxford Academic.
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Signed in but can't access contentOxford Academic is home to a wide variety of products. The institutional subscription may not cover the content that you are trying to access. If you believe you should have access to that content, please contact your librarian. Institutional account managementFor librarians and administrators, your personal account also provides access to institutional account management. Here you will find options to view and activate subscriptions, manage institutional settings and access options, access usage statistics, and more. What are the main political causes of instability in international markets?There are five main political causes of instability in international markets: (1) some forms of government seem to be inherently unstable; (2) changes in political parties during lections can have major effects on trade conditions; (3) nationalism; (4) animosity targeted toward specific countries; and (5) trade ...
What is the top political issue concerning foreign businesses?exam 1. What is political stability quizlet?Political stability. A condition of orderliness found in a nation that is characterized by:The rule of law, sovereignty respected by outside powers, and economy, that meets people's needs, and a general level of social contentment and equality.
What is international political economy quizlet?IPE (International Political Economy) the interdisciplinary science that examines the dynamic interactions between markets, states and societies, and how the tensions and conflicts between these arenas both affect and reflect conditions outside the nation-state and society.
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