Investing and politics: what should every investor know?

Investing is a journey towards financial security, but it is not an isolated journey. Global events, economic trends and political decisions all have an impact on markets and therefore on your investments. While politics may seem distant and abstract, it is an important factor that every investor should take into account.

In this article, we look at how politics can affect the economy and stock markets, and what you can do to protect your investments from political risks.

The impact of policy on the economy

Policies affect the economy at many levels. Governments shape the economic environment through a range of policies and regulations, which in turn influence business activity, consumer behaviour and investment.

Macroeconomic policies:

Fiscal policy: Government decisions on taxes and spending affect economic growth and inflation. For example, tax cuts can stimulate the economy, but they can also increase public debt. Conversely, raising taxes can slow economic growth but give the government the resources to finance public services.
Monetary policy: The central bank's decisions on interest rates and the money supply affect the availability of credit and the level of investment. For example, lowering interest rates can encourage borrowing and investment, but it can also lead to inflation. Raising interest rates, on the other hand, helps to contain inflation but can also slow economic growth.
Trade policy: Government decisions on tariffs and trade agreements have an impact on international trade and business competitiveness. For example, raising tariffs can protect domestic industry, but it can also lead to higher prices and less purchasing power for consumers. Trade agreements, on the other hand, can open up new markets and boost economic growth.

Regulations:

Labour market regulations: Minimum wages, working time limits and trade union rights affect labour costs and company profitability. Raising the minimum wage, for example, can improve workers' living standards but also lead to job losses.
Environmental regulations: Emission limits and environmental protection requirements have an impact on companies' activities and investments. For example, stricter environmental requirements can encourage the development of green technologies, but can also lead to higher costs for companies.
Financial regulations: Banking sector and financial market regulations have an impact on the stability of financial institutions and investment risk. For example, stricter banking regulations can reduce the risk of financial crises but also limit access to credit.

Political stability and uncertainty:

Elections and changes of government: Political changes can lead to uncertainty and affect investor confidence. For example, if an election brings to power a party whose economic policies are unclear or radical, this could lead to a fall in stock markets.
Geopolitical risks: International conflicts, terrorism and political instability can have a negative impact on the economy and investment. For example, the outbreak of a military conflict can lead to a rise in oil prices and a fall in stock markets.

Policy impact on stock markets

Equity markets are sensitive to political events and decisions. Investors react to news and expectations, which in turn affect share prices. Politics can affect stock markets in a number of ways:

Investor confidence:

Political stability and predictability: A stable political environment and predictable economic policies foster investor confidence and investment. Investors are more willing to invest when they believe that the government will make decisions that support business and the economy is stable.
Political risks and uncertainty: However, political instability, uncertain economic policies and unexpected political events can undermine investor confidence and lead to a fall in stock markets. For example, if a government unexpectedly imposes new taxes or regulations, this can negatively affect corporate profitability and share prices.

Sector and company specific impacts:

The impact of tax reforms on corporate profits: Tax reforms can have a significant impact on corporate profitability and hence share prices. For example, lowering corporate tax rates can boost corporate profits and share prices, while raising taxes can have the opposite effect.
The impact of regulation on competition and innovation: Regulations can affect competition and innovation in different sectors. For example, stricter environmental requirements can encourage the development of green technologies, but can also lead to lower share prices for traditional energy producers.
Government grants and subsidies: Government subsidies and subsidies can encourage the development of certain sectors or companies, and thus increase their share prices. For example, subsidies for renewable energy can stimulate the growth of solar and wind energy companies.

The impact of elections on stock markets:

The economic policies of the different parties: Different political parties have different economic policies, which can affect investor expectations and stock market behaviour. For example, if a party that promises tax cuts and pro-business policies is expected to come to power in an election, this could lead to a rise in stock markets.
Market reaction to the election results: Stock markets often react to election results, depending on whether or not the results meet investors' expectations. For example, if an election brings an unexpected result, this can lead to market volatility and stock price volatility.

Examples from history

History offers many examples of how politics has affected the economy and stock markets. Here are some highlights:

The 2008 financial crisis and government intervention

The financial crisis of 2008 clearly showed how political decisions can affect the global economy and stock markets. During the crisis, governments actively intervened in the economy, providing bailouts to banks and companies and imposing new regulations. These measures helped to cushion the crisis and prevent a total collapse of the economy. For example, the US government adopted a $700 billion rescue package to support financial institutions and stimulate the economy.

The impact of Brexit on the UK and European economies

The United Kingdom's departure from the European Union (Brexit) brought uncertainty and had a negative impact on both the UK and European economies. In the days following the Brexit referendum, stock markets fell sharply and sterling depreciated. Studies show that Brexit has reduced UK GDP around 2.5% compared to a scenario where the country would have stayed in the EU.

Impact of the US-China trade war on global stock markets

The trade war between the US and China, which started in 2018, led to tariff hikes and trade restrictions that negatively impacted global growth and stock markets. During the trade war, stock markets became volatile and investors were uncertain about the future. The International Monetary Fund (IMF) estimates that the trade war reduced global GDP by 0.8%.

How can investors hedge political risks?

While it is impossible to fully control politics, investors can take steps to mitigate the impact of political risks on their investments. Here are some strategies:

Scattering: Invest in different asset classes (equities, bonds, real estate, commodities) and geographical areas. This helps reduce the risk that political events in one country or sector will affect your entire portfolio. For example, if you invest only in shares in your home country and there are political changes there that have a negative impact on the economy, your entire portfolio will suffer. If, on the other hand, you have diversified your investments across countries and sectors, the risk is spread.
A long-term investment strategy: Long-term investment strategy helps you ignore short-term market fluctuations, often caused by political events. History shows that stock markets have always risen over the long term, despite political crises and recessions. So, if your investment horizon is long, you don't need to worry too much if the political situation changes.
Monitoring political events and trends: Keep abreast of political events and trends that could affect your investments. Read the news, follow analysts and experts and do your research. This will help you make informed investment decisions and react to changes in a timely manner.

In addition to these strategies, it is also important to psychological preparation. Political events can create uncertainty and fear, which in turn can lead to irrational investment decisions. It is important to remain calm and make decisions rationally, based on facts and analysis, not emotion.

Finally, don't forget that investing always comes with risks. Political risks are just one part of it. It is important to understand the different risks and to find ways to mitigate them. If you are unsure how to manage political risks, consult a financial adviser.

To sum up

Politics and economics are closely linked. Government decisions on taxes, spending, interest rates, regulations and trade policy all affect business activity, consumer behaviour and investment. This, in turn, affects stock markets, investor confidence and share prices.

Investors should be aware of political risks and take them into account in their investment decisions. Some strategies to mitigate political risks are diversification, long-term investment strategy and monitoring political events.

It is important to remember that there are always risks involved in investing, and that politics is only one of the factors that influence these risks. A wise investor is an informed investor who makes his decisions rationally and takes into account all relevant factors.