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.