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Political Risk on the Economy
And why weighting is important.
With the world is getting more peaceful and with Singapore almost always stable, it is often easy for Singaporean to believe that stability and peace is the norm. Singapore is usually the exception rather than the rule here.
With many trigger points such as the pandemic, lockdown and the possible ensuing inflation, we could be expecting more volatility on many part of earth?
The past years had been a wake up call for many investors, with various form of instability from US, UK, China, Turkey and now Kazakhstan. A stable political situation will determine a possible stable economic environment which makes it conducive for investment and growth.
That may be why the US is the favoured place for investment as the “political situation” is deemed to be more stable than the rest.
But high stability usually comes at a price for it is usually highly centralised.
A highly centralised human created structure is usually pretty stable until a confluence of events bringing the whole system to their knees. During the 1997 Asian Financial Crisis, many ASEAN economies blew up and that took many years of nursing before the economies spring back to health.
So what system is considered as centralised or decentralised?
The Turkish economy seems highly centralised. The government had been proposing a series of radical policies causing rapid rise in inflation and there is hardly any pushback from any part of the country.
Kazakhstan seems to be highly centralised as a confluence of factor such as the pandemic lockdown, painful reform - a rise in fuel prices and tighter monetary policies may have resulted in the violent protest.
So what system is decentralised?
ASEAN comes to mind. The countries mind their own business. They take turn to take the leadership role, have regular chat and just get on with their own life. Any demise of the any country would have minimal effect on its partners.
What about Europe? It has a common currency, and Brussels seems to be able to make rules on what the bloc can and cannot do. Does any country really follows the rule except France and Germany? I always look at Europe and wonder why it is still surviving as a union but then that could be argued on the Unites States and China as well.
Some systems are like a mix of both - United States is centralised on a federal level - where things get ‘debated’ and decided and decentralised in some senses as the various states also get to decide what is best for them.
In China, the Chinese government do have the power to decide policy changes unilaterally throughout China, but the local province do get some leeway on interpreting and executing the directive from Beijing.
I guess any large enough country works in the same way - some centralisation and some decentralisation. Big enough and you can suffer some inefficiency within the system.
So what has that gotta do with the stock market?
In the midst of June 2021, quite a few twitter account I am following starts talking about the value stocks in Turkey - meant that stock price had fallen off and they look cheap. Maybe the stock market is a really good predictor of things to come. The depreciation of the Turkish Lira reminds me of the depreciation of the Indonesian Rupiah albeit with different causality.
What if the market did not predict the political uncertainty like the one happening in Kazakhstan now?
Is it be an opportunity or a trap?
Six months ago, I had previously written an article on the most exciting bank you have never heard of in the world.
Is a digital bank still worth anything during a really violent protest?
If you click on the link above, it seems that even the physical bank branches are in danger! My friend in Kazakhstan seems to be pretty much uncontactable for now as internet is also down!
This brings me back to the idea of weighting in your portfolio. A twitter account which I have been following recently tweeted that weighting has been a bane on his portfolio. It seems that he has weighted too heavily on his high conviction ideas which turns out to be not so rewarding after all.
Instead of thinking of trying to maximise your return, isn’t weighting more useful for risk mitigation?
Despite having a clear liking for Kaspi.kz, I have a really tiny position in the company. It is a company that I am still learning about, operating in a country where I am not familiar with. Since Kaspi.kz is a really small position, I could have easily close off or double the position with minimal effect on my overall portfolio.
My current assessment is that the troops from Russia will most likely quell the violent protestor but it could easily have simmer another bigger protest down the road.
The main lesson here is that weighting in the portfolio should correspond to the risk you are underwriting. That is the main lesson that everyone had forgotten during this extraordinary bull market.
By looking at the universe of investments one can understand, one should also weigh the risk and weigh the position appropriately.
Sometimes, it is just a smaller position, sometimes a larger one. Maybe a diversified portfolio or sometimes a more concentrated one.
As I continued to ponder about my weighting in Kaspi.kz, maybe it is time for everyone to analyse the possible risk inherent in their portfolio.
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