Political Risk Keeping Investors Up At Night

Nationalism, low growth worry investment professionals: survey

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Egypt Riots_edited-1Investment professionals worldwide expect the global economy to grow at just 2% in 2015, finds the CFA Institute 2015 Global Market Sentiment survey.

Respondents—who include portfolio managers, research analysts, and C-suite executives—cite political risks, including secessionist and nationalistic movements, as the most underestimated risk that could negatively affect markets in the next five years.

And they expect only modest gains in equity market indices next year. They predict the S&P/TSX Composite Index will climb 1.5%, the S&P 500 will rise 4.8%, the EuroStoxx 50 will increase 1.9%, and a 1.6% rise for the Nikkei 225.

Respondents are also concerned about ethical issues, including market fraud and the need for improved regulation and oversight of global systemic risk to improve investor trust and market integrity.

“Our members are wary of sluggish developed market economic growth and the effects of political disruptions,” says Kurt Schacht, managing director, CFA Institute. “At the same time, market fraud, like insider trading and the integrity of financial reporting, remains a cause for concern.”

Investment professionals cautious on global growth
Respondents in Canada expect local GDP to grow by just 1.7%. On the higher end, respondents expect India to see robust 5.8% growth in the economy there, and members in China anticipate 6.2% growth. Members in Switzerland, Japan, France, and Brazil all expect growth of less than 1% in their home markets.

Forty-five percent of Canadian members cite weak external economies as the largest risk to Canada’s performance in 2015. Of those, 23% cited weak emerging market economies as the biggest risk, while 22% identified weak developed economies as the biggest risk.

Twenty-three percent of Canadians cite political instability as the biggest threat to global capital markets in 2015, while the same number cite the poor performance of developed markets as a leading risk. When asked about the most underestimated risk that could affect global markets over the next five years, 28% of Canadians cited political risk, including secessionist and nationalist movements, and 26% identify the impact from the demographic trend of aging populations.

The U.S. and China remain the top picks for equity market performance in the coming year, as was the case in the 2014 survey, followed this year by India and Russia.

Market fraud and integrity

Global respondents view market fraud, such as insider trading (25%), and the integrity of financial reporting (24%), as the most serious ethical issues facing global markets in 2015.

Thirty-two percent of Canadian respondents say misaligned incentives of investment management services is the biggest local threat.

Improved global oversight

Globally, 28% say improved regulation and oversight of global systemic risk is the action most needed to help improve investor trust and market integrity. In Canada, 31% see improved enforcement of existing laws and regulations as needed in the coming year to improve investor trust.

Globally, members indicate that improved enforcement of existing laws and regulations (26%), closely followed by improved corporate governance practices (24%), are the regulatory or industry actions most needed to improve investor trust in their home markets.

Ethical culture in financial firms

Sixty-three percent of global members point to a lack of ethical culture within financial firms as the factor that’s contributed the most to the current lack of trust in the industry.

Better alignment of compensation with investor objectives (31%), a zero-tolerance policy by top management for ethical breaches (27%), and increased adherence to ethical codes and standards (21%) are the most needed firm-level actions in the coming year.

“Concerns about market integrity remain at the forefront of our members’ minds,” said Schacht. “Improved oversight of global systemic risk is the most important action needed over the coming year to build trust and market integrity. This finding suggests that in the six years since the global financial crisis, the degree of cross-border cooperation between regulators with regard to detecting and mitigating systemic risk does not yet appear to be sufficient.”

A version of this story was originally posted on our sister site, Advisor.ca.

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