Game theorist pins stock market fortunes on Spain, not Brexit
ZURICH: If you’re looking to make money betting on political turmoil, the market to watch right now is Spain, not the UK, says William Blair Investment Management LLC’s Brian Singer.
Singer and his team of 12 analysts and fund managers in Chicago are focusing on the general election scheduled for June 26, three days after Britons choose whether to leave the European Union. They’re scrutinizing Spain’s political leaders for a sign that the pro-market Ciudadanos and incumbent People’s Party are willing to form a coalition.
Singer, who sold out of Spain after December’s inconclusive vote, is now looking to get back in. As others withdraw, he sees a political landscape with so many moving parts that applying his specialty, game theory analysis, is likely to bear fruit.
“There’s lots of opportunities there,” said Singer, the manager of the $1.8 billion William Blair Macro Allocation Fund, which beat most of its peers in the last three years. “Spain made tremendous strides to reform its banking sector and made a lot of progress throughout these years. The political risk is the only barrier to investment.”
The team manages a total of $2.7 billion for William Blair through several funds and looks for cheap markets where investor anxiety is on the rise. When political tensions are high, it uses game theory to assess the probability of an event and compare it with its associated risk. If the model indicates exaggerated fear, it’s time to buy.
In explaining the use of game theory in such settings, the firm cites “rock/paper/ scissors,” where the outcome is determined by the secret choices of independent players. Politicians are faced with those kinds of challenges all the time, trying to predict the reactions of allies and foes when they take actions such as leaving a coalition.
Another set of problems tries to assess the likelihood of cooperation among players, the most famous example being the “prisoner’s dilemma,” in which a pair of separated crime suspects face hidden incentives to act in each other’s interest.
A multi-party election bears a passing resemblance to that model, where the rewards of forming a coalition may surpass those of staying independent.
In the case of Spain, where the benchmark IBEX 35 Index trades near a three-year low relative to peers, Singer says the market is too pessimistic about the chances of Ciudadanos giving in and forming an agreement with the PP.
“Spain never had to develop a coalition since Franco, so we’re now in the middle of the most interesting game theory theatres,” Singer said. The most likely party to concede in negotiations is Ciudadanos, a chance the market doesn’t fully reflect, according to him. “Ciudadanos has been slowly migrating towards the centre, where it tries to establish itself as a viable centre-right option.”
Game theory has been used in a wide range of areas from politics to biology, but not as much in investing, said Singer, who was also the chief investment officer for UBS Group AG’s wealth-management unit in the Americas until 2007 and has been fascinated by the subject for decades.