Political Risk

Michael Rudd, CFA | President, CEO and Portfolio Manager

This week, during our weekly Investment Committee meeting, our Resources team presented analysis on a company that has assets located in Nicaragua. Last week, the US Government banned US Companies from doing business in Nicaragua’s gold industry, in attempt to increase pressure on the Nicaraguan government. “The Ortega-Murillo regime’s continued attacks on democratic actors and members of civil society and unjust detention of political prisoners demonstrate that the regime feels it is not bound by the rule of law,” Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson said. He said the U.S. actions aimed to deny them “the resources they need to continue to undermine democratic institutions in Nicaragua”. This is a small example of a growing trend that we want to highlight: political risk is becoming a more significant consideration for global investors.

  • In the United States, there has been material self-inflicted domestic political risk but also a substantial effort to block hegemony rivals on a global basis. Domestically, the wealth gap has resulted in political dysfunction and a bipolar electorate. Internationally, the US has been attempting to mitigate its decreasing global influence. Over the years, multiple administrations have developed policy that has resulted in sanctions against some of the largest economies and industries in the world.


  • From the start of this year, the Russian invasion of Ukraine has caused significant impact on the supply of food for many developing nations and the supply of energy for Europe. It has also resulted in increased tension between China, India, Europe and the US, as each country(ies) attempt to protect its interests.


  • China is somewhat unique on this list, as it has multiple major issues for investors to consider in a somewhat opaque environment. We conclude that the US and China are currently in a medium to long-term struggle to determine who influences world order. Furthermore, China has essentially just selected “a new leader for life” which creates a risk of policy mismanagement on multiple fronts. Some examples: the current “Zero COVID” policy, which has resulted in mitigation measures that have significantly impacted their economy, a focus on infrastructure & real estate development that has led to a potential debt crisis, the impairment of industries deemed not to be “too powerful” and the potential unification of Taiwan, which would make the impact of the Russian/Ukrainian conflict look small by comparison.

“This means that” based on only the countries above, 44.0% of global GDP (source: IMF, 2022) is now impacted by what we would consider to be “material political risk”. This is new, even from just a few years ago. A significant tenet of our investment management process is that we, as research analysts, attempt to truly understand the businesses that we own. Going forward, we believe this will become an even more important part of the investment process that all investors will need to pay attention to. There will be more risk with respect to geopolitical issues, but there will also be many opportunities. Understanding what you own will become critical to successful investing.

Pathfinder Asset Management Ltd. | Equally Invested™
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Sources: Pathfinder Asset Management Limited

National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.

*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).

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