Elections in Africa tend to be associated with security and political risks. This year has seen a number of important national elections in sub-Saharan Africa. As several African countries take turns to go to the polls, individuals and organizations cannot afford to ignore the investment risk that comes with it.
For investors, political risk can simply be defined as the risk of loss due to changes that occur in a country’s government or regulatory environment. This could arise from the expropriation of assets, a new president or prime minister, a change in the country’s ruling party, or change in existing legislation or introduction of new laws.
It is well known that political stability is a prerequisite for economic stability; without it, policy initiatives and structural reforms can stagnate, decision-making becomes sluggish at best, and investor confidence begins to ebb as investors naturally seek safe havens for their investments.
Where there are high levels of unemployment, currency devaluation, an air of insecurity and political uncertainty, it is easy to become discouraged and anxious. Even though some of these situations are uncontrollable, you can be proactive about taking charge of your financial life and putting measures in place to minimize your risk.
To navigate the uncertainty that political risk presents, especially when important elections are coming up, try to familiarize yourself with the candidates, their political parties and their economic policies and plans. These may have a direct impact on your personal finances.
During periods of uncertainty, the natural tendency is to sit on the sidelines and stay out of the markets. Yet, uncertain times and volatile markets usually present opportunities for those who are well positioned to take advantage of them. For example, asset values, including stock, and real estate may sell below their true value as a country experiences capital flight.
Diversification is a tried and tested method for mitigating the effect of political risk. As the old adage ‘don’t put all your eggs in one basket’ reminds us, if you put all your money in one investment, your return will depend solely on the performance of that investment. Diversification spreads your risk across various asset classes, including cash, money market accounts, stocks and real estate as they tend to respond to market vagaries and financial conditions differently.
Beyond diversification across asset classes, consider diversifying assets across jurisdictions. Limit your exposure to single country risk by having a mix of domestic and international investments; that way even if the measures you have put in place to reduce your exposure to political risk prove to be inadequate, you have a better chance of limiting the damage to your portfolio.
It is not possible to avoid political risk altogether. Whether you manage your financial affairs by yourself or use the services of a professional, you are still susceptible to risk as all forms of investing come with a degree of uncertainty. You do need to familiarize yourself with the various risks associated with the markets in which you invest so that you can reduce your exposure by adjusting your investments as appropriate. Ultimately, you are responsible for your money.
For those that crave a level of certainty and predictability, the need for having a sound long term financial plan in place becomes more glaring than ever, and is key to financial security. If you stay focused on your goals, you are less likely to be swayed by market hype, volatility, inflation, devaluation, insecurity and political uncertainty and more likely to come out relatively unscathed when the climate begins to change.
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