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Unio Capital is an asset management firm—oriented to publicly-traded equities, global in scope, and equipped to manage hedged and long-only portfolios as funds and separately-managed accounts.

Political Risk Matters

In Perspective

Unio's "In Perspective" short-form series covers the Unio team's views on topics ranging from investing to business to economics.  


Political Risk Matters

John Allison

For the investor, political risk is not primarily about events.

It is not, for example, about coups d’état, riots in the street, even wars. Risks associated with events tend to spike up and down quickly.

Political risk for the investor is primarily about conditions. A doctor asks: what is the patient’s condition? The investor asks the same question, except that the patient in question is usually the nation: what is the nation’s condition? 

A nation is a complex organism which, like DNA, has four building blocks:

  1. Its people – as discrete individuals and discrete groups
  2. Its government – with its laws, rules, enforcement powers, and legitimacy
  3. Its economy – private and public
  4. Its culture – intangibles such as attitudes, values and practices in people’s heads

A nation’s riskiness depends on the combined risk of these four building blocks as well as how much of that risk is transmissible to the world.

Through the lens of risky national (or regional) conditions and their outward transmission, we see four epicenters of political risk today:


  • Despite an amazing 34-year record of growth and incredibly smart and industrious people, China represents the single largest risk in the world today. It must transition to an economic engine less reliant on export earnings and to employment growth less driven by 50% of GDP spent on capital projects like housing and roads.
  • Globally, this will mean the end of 15 years of natural resources boom. Watch out commodities prices! The central government will have to become stronger internally to effect any such transition program.
  • Entrenched interests, however—local governments, cities, state enterprises, banks—will resist it, setting up the age-old Chinese tension between the center and fiefdoms.
  • For popular support, China will become more nationalistic. It will treat foreign investors more harshly. Its foreign policy will be more assertive—both economically and militarily.

The United States

  • Although the most stable and prosperous of large countries, the US is riskier than it appears. In 2007–9 that risk was transmitted to the world in the form of bad assets generated by housing excesses, enabled both by the private sector and government.
  • In 2009–13 risk is appearing through an excessive reliance on monetary largesse, a response to the limited actions of the Executive and Congress, which, in turn, reflect the absence of sufficient national consensus on the country’s best direction.
  • June’s announcement of tapering by the Fed and the instant negative impact on emerging-market balance of payments and on world bond and stock markets, is an indication of how impactful the dialing back of US risks can be.

Peripheral Europe

  • A recovering region, with some awakening (e.g. Spain, with Ireland and Italy on the cusp). Exports and employment are struggling. Structural change to free up mid-sized businesses is especially slow. The Achilles Heel of Europe is healing but needs more therapy.

Other risk hotspots

  • Russia (exposed to the commodity downturn and exposing the world to a more aggressive foreign policy).
  • Selected emerging markets that became too dependent on hot foreign money that distorted their capital markets and misallocated resources (e.g. Brazil).
  • The Mid-East, now more than ever divided.

Political risk is about risks in the condition of national health and its potential for transmission within and beyond the nation—and of those risks there are plenty in our world.

– John A. Allison