AFTER the surprise decision of Britain to leave the European Union, and the election of Donald Trump as American president, there is a lot more talk about political risk than there used to be. Investment banks have been poring over the prospects for elections in Britain (which take place today), Germany and Italy to figure out who might take power in each. But what does the term itself mean?

In essence, political risk is the danger that the actions of governments might reduce the cash-flows that investors expect from their investments. Broadly, this can merely mean economic mismanagement, such as allowing inflation to accelerate too rapidly (thereby damaging the real value of fixed-income investments like bonds) or precipitating a recession (which would cause companies to go bust and hurt equities and corporate bonds).

But the term is used more specifically to refer to actions designed to penalise investors or companies. These include nationalisation, higher taxes, extra regulations, barriers to trade and so on. From the 1990s onwards, investors were indifferent as to which party gained power in developed countries. Centre-left politicians such as Tony Blair in Britain, Bill Clinton in America and Gerhard Schröder in Germany were just as friendly to the markets as those on the right. But the rise of populist parties has caused political risk to re-emerge.

That is because populist parties often promote nationalistic, or nativist, policies which seem to discriminate against foreign companies, workers and goods. That is a problem for businesses, which moved in the 1990s and 2000s to a model based on global supply chains, giving them integrated operations in many different countries. Trade barriers would disrupt that model. Donald Trump had a populist appeal but combined it with a traditional Republican emphasis on cutting taxes for companies and the wealthy; that is why stockmarkets have risen since his election. But his nationalism might yet cause problems for them, if it leads to trade wars or actual conflicts. And left-wing parties, like Jeremy Corbyn’s Labour in Britain, would be more openly hostile to investors; markets would be rattled if he looked close to gaining power.

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