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How and why politics affect international markets

Financial markets can be a fickle beast. The success or otherwise of a company, sector, country or region relies a lot on confidence – a factor that is hard to win, tough to maintain and easy to lose. Many factors contribute to a feeling of confidence but one factor that you shouldn’t lose sight of – especially as an international business – is the impact that political events can have on the economy.

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Whether you’re investing with the cheapest futures broker you can find or have called on the services of an expensive asset fund manager, it pays to be aware of the power of politics.

Short sharp shock

The first, and perhaps most obvious, way in which this manifests itself is through ‘shocks’ to the system. Markets like to know where they are and politics has the potential to upset the applecart. Whether it’s a surprise election result which is likely to mark a big change to the status quo (something like Donald Trump’s election to the White House) or Brexit, in which UK voters narrowly opted to leave the European Union.

A short, sharp shock can then have a ripple effect throughout an economy. Take the UK restaurant sector, for example. The fall in the value of the pound – which followed the Brexit vote – caused the cost of imports to rise (given that much of the UK’s food is brought in from overseas). That squeezed profit margins at a time in which customers have suffered stagnant wages and don’t have large disposable incomes to play with. As a result, accountancy firm Moore Stephens found that 20 percent of UK restaurants (14,800 outlets) are now threatened with closure. It said that the number of restaurants declaring insolvency rose 13 percent in the year ending March 2017, with chains such Byron, Prezzo and Jamie’s Italian all shutting sites and Handmade Burger going into administration.

This is a good example of how a political shock can prompt an economic after-effect, with the pound falling in light of the uncertainty caused by Brexit, import costs rising as a result and this, in turn, proving problematic for restaurants operating on tight margins.

Setting the parameters

This isn’t the only way in which politics and the markets are intertwined either. While a short, sharp shock can send a ripple effect through an economy, governments have the power, over the longer term, to set the parameters in which sectors and regions can do business.

Brexit, once again, offers us a good example of this. London has long been seen as a key global financial centre – with financial services a key part of the UK economy – so all eyes will be on the relationship between the EU and UK going forward. Without ‘financial passporting’, banks and other financial firms might find it tougher to continue to operate as they do now. Any barriers to this will mean that rivals – Frankfurt and Paris – aim to become the go-to location for overseas companies operating in the European Union.

It isn’t just financial services where this will be telling, either. Tariff and non-tariff barriers (such as country of origin checks) could impact on any sector of the UK economy going forward. The negotiations currently underway will be able to shape the way in which billions of pounds of trade will be conducted for years to come – and could impact on every business and sector in both the UK and EU.

Brexit might be the biggest and most extreme example of this but whether it’s Canada and the EU (its recent deal should eliminate tariffs on 98 percent of products and save Canadian businesses €590million a year) or the Transatlantic Trade and Investment Partnership (TTIP), governments across the globe are constantly locked in trade talks that can shape the future of the markets.

Rules and regulations

Finally, politics and politicians can play a big role in introducing rules and regulations that stamp out on particular financial practices.

Recently, for example, South Korea has introduced new rules on cryptocurrencies to try to remove the chance of criminals or children being able to trade with the likes of Bitcoin. It’s thought that the European Union might well follow suit, with its own tougher rules on cryptocurrencies. Rules such as this – and maybe tougher ones to come – might well serve to keep the price of this asset in check, after a year of eye-popping growth in 2017.

Politicians have the power to drive through legislation that can limit, outlaw or, of course, free up trade, reducing or boosting trade accordingly.

Whether it’s a short, sharp political shock creating a ripple effect, trade deals setting the parameters for business relationships or new rules and regulations that could block or expand financial practices, politics and politicians have power and influence over the way the markets operate.

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