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Trading Politics Mini-Case G4S ($GFS.L / $GFSZY)

I recently wrote about trading politics. There is a strong correlation between politics and equity market valuations. In recent years this has been a stronger driver than fundamental value or even market momentum. This week has provided numerous examples including the Executive Action on immigration reform. See:

To follow up on my previous post, I'll be conducting an analysis of a highly politically correlated company called G4S plc it trades on the London Stock Exchange as




as a U.S. OTC. Using the FTSE RAFI UK index, the company has a beta of -0.95. It is essentially negatively correlated with equity markets, because it is so strongly tied to political movements.

The G4S 10K describes operations as such: "… It [G4S] offers secure solutions, including risk services and consultancy services, such as risk management consultancy services, including personal protection, training, mine detection, and clearance services; access control, CCTV, intruder alarms, fire detection, video analytics and security, and building systems technology integration; mobile security patrol and response services, and alarm receiving and monitoring facilities; secure facilities services; assisting long term unemployed people into work; and manned security services. The company also provides care and justice services, such as juvenile and adult custody; prisoner escorting; asylum services; electronic monitoring; and police services. In addition, it offers cash solutions, including cash transportation, high security cash centers, counting and reconciling cash, fitness sorting of notes for use in automated teller machines (ATMs), counterfeit detection and removal, and redistribution of cash to bank branches, ATMs, and retail customers; consultancy services to central banks and commercial banks on overall cash management strategy, bank note production and security, and various aspects of cash cycle efficiency; managing ATMs on behalf of banks, retailers, and independent ATM providers; retail cash management services; international transportation and insurance of currency, gems, and other valuables; and secure transportation of cash. It serves various sectors, including government, private energy and utilities, oil and gas, transportation and logistics, ports and airports, leisure and tourism, financial institutions, mining, corporate and industrial, and retail. G4S plc was founded in 1901 and is headquartered in Crawley, United Kingdom."

While the company is a leader in the sector, it suffers from particularly high volatility due to a willingness to accept controversial contracts that attract political attention. In a business where the primary revenue drivers are government contracts this creates a high level of political risk. In April 2013, the company adjusted strategy for political reasons spurring a -36% drawdown in a matter of days. The company has built up years of political risk in the form of ongoing contracts in conflict zones. To date there has been little push back in the U.S. from governments holding G4S contracts. Next week several U.S. security contracts will be put to the vote under mounting political pressure for localities to cancel G4S contracts. If this occurs, it will be a drop in the bucket for the revenue G4S collects from U.S. contracts, but it will establish political precedence with large scale ramifications for the U.S. contracts. In response to mounting political risk in the U.S., G4S has quietly begun spinning off the U.S. business. See:

Given the volatility of G4S equity, the near term prospects for the company appear dim. I used G4S as an example of politics causing volatility in a specific equity. Over the next week I will work on a post about statistical analysis of political events using regression analysis. The G4S analysis was based on public announcements of the company and governments involved.

Disclaimer: I do not hold G4S or any related security in any portfolio. Nothing in this post constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to an investor's individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. I do not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. The post should not be regarded by recipients as a substitute for the exercise of their own judgment. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Any opinions expressed in this report are subject to change without notice.

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.