I have talked about the importance of looking out for investment risks, and also wrote about how to incorporate a stock’s risks in a properly structured investment thesis.
Through a short series of articles, I would like to list six major types of investment risks, and each major type shall be elaborated on within an article. The six types are: (i) Management; (ii) Industry and Competitive Moat; (iii) Political; (iv) Economic; (v) Social; and (vi) Legal/Regulatory.
In previous articles, I had discussed Management risks, and Industry and Competitive Moat risks. They can be found here and here. In this article, let’s continue with a discussion on the political risks affecting a company.
History of political coups or upheavals
The risk of a political coup or displacement cannot be under-estimated, as investors may suffer painful lessons should their investments be affected by such events. The key is to assess if a country has a history of political instability, and also the chances of it occurring again in the near future.
For example, Thailand has had a total of 12 military coups since 1932 through 2014, which works out to be an average of one political coup every 6-7 years. Libya is country which has its fair share of political problems and civil wars, with major strife breaking out in 2011 which ultimately led to the ousting of then-dictator Muammar Gaddafi. As recently as this year, Malaysia also saw a political defeat of the ruling Barisan Nasional, which had run the country since independence in 1957. Investors should be mindful of their exposures to countries with political changes and ensure that the companies they own are not overly reliant on government contracts or projects.
Political wrangling or stalemate
Countries with frequent political wrangling may also result in a loss of investor confidence, thereby affecting companies which have operations in these countries. This may be due to a coalition government where stalemates occur or a political process which contains excessive red tape such that nothing ever gets done. This could result in delayed infrastructure projects, for instance, and construction companies which hinge on such projects may inevitably face financial pressure.
Quick or sudden change in policies
Another aspect of political risk is when policies or regulations for specific industries or sectors change abruptly or without warning. Some examples could be the disallowing of foreigners to purchase land and buildings, the sudden imposition of punitive taxes on certain categories of items, or increased scrutiny with respect to the production, sale and distribution of certain types of items.
History of minority persecution
If a country has a history of persecution against minority races, it may signal that the government there is neither competent nor dependable, and investors would be doing themselves a favour by staying away. [Editor’s note: The fourth part of this series has been published. It can be found here.]
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.