Why business and politics don't mix

By MoneyWeek Editor John Stepek Mar 28, 2006

John Stepek

***Why business and politics don't mix

***The foreign politician we'd like to see as UK Chancellor

***RECOMMENDED ARTICLES: Why protectionism is the top threat facing the US... Are shares the best long-term buy?...

Business and politics just don’t mix.

Capita chairman Rod Aldridge has learned that lesson the hard way. The head of the outsourcing firm, which runs London’s congestion-charging system, has stepped down amid Labour’s loans-for-peerages scandal.

Mr Aldridge said his decision to loan the Labour party £1m was “made in good faith as a long-standing supporter of the party.” But “spurious” suggestions that this had “resulted in the group being awarded government contracts” were harming the company’s reputation – hence his decision to leave.

It’s a laudable move. The idea of sacrificing your own position for the greater good of those around you is something that would never occur to a politician, least of all Tony Blair.

But Mr Aldridge’s sorry tale isn’t the only case of politics interfering with business currently in the news. A far more serious case is brewing, one with implications for the global economy...

Dubai International Capital (DIC) has suspended its £690m purchase of unlisted UK engineering company Doncasters.

Among other things, Doncasters runs several US plants making parts for defence contractors. If the deal goes through, DIC would have control of US factories making aircraft components for the US military.

The takeover was due to be completed at the end of this month. But that was before the debacle over the P&O / Dubai Ports World takeover.

As you’ll no doubt remember, DP World had to hand over control of six US ports to a “US entity” because politicians in Washington weren’t happy about an Arab company running US ports. This was despite the fact that port security would remain the responsibility of US Customs and the Coast Guard.

So you can imagine how the same politicians might react to Dubai owning factories churning out US military equipment.

DIC has pulled out in anticipation of such a reaction. It now won’t proceed with buying Doncasters until it has the explicit approval of the US Committee on Foreign Investment.

Maritime experts have already condemned the blocking of the P&O deal, saying it was driven by “politics, ignorance and bigotry” rather than “honest security concerns”, according to Reuters.

But as Morgan Stanley’s Stephen Roach points out: “The Dubai port incident, unfortunately, is only the tip of a much bigger iceberg. There was also last year’s high-profile rejection of a bid to buy Unocal by a Chinese oil company.”

And, he says: “Washington’s increasingly xenophobic politicians have gone even further. A leading US senator floated the possibility of legislation preventing cross-border acquisitions of US companies by foreign state-owned entities.” For more from Mr Roach on this topic, click here: Why US protectionism could topple the dollar

The US is acting as though it can happily dictate terms to its trading partners. But it is in fact in a hugely weak position. The country relies on Gulf oil producers and Asian exporters to keep the dollar propped up.

As Edward Hadas on Breakingviews says: “The heavily indebted superpower provides much of the Middle East’s oil revenues. It may regret turning down the chance to bring those petrodollars back home.”

The good news is that the United Arab Emirates seems willing to take a pragmatic view of the US’s attitude – for the time being.

Arriving in the US to smooth relations after the failed DP World deal, Sheikha Lubna Al-Qasimi, the Minister of Economy from the United Arab Emirates, insisted that trade relations between the two countries remain solid.

According to United Press International, her only negative reference to the DP World deal was: “Someone misjudged. That’s what happens when you have politicians getting involved in business.”

With that attitude, she sounds exactly like the kind of economy minister we’d happily vote for here at MoneyWeek.

You can find out more on why the rising mood of protectionism across the globe is one of the biggest threats facing the world economy in one of today’s recommended articles, below.

And you can read more about why Dubai is the kind of place the US should be cultivating as an ally, rather than alienating, by clicking here: What Dubai could teach the US about capitalism

Turning to the stock markets…

The FTSE 100 closed 17 points lower at 5,990. Supermarket group William Morrison was the main faller, shedding 6% to 197.5p a share, after posting the first annual loss in its 106-year history. Another retail casualty was Next, down 4% to £16.62, as same-store sales slumped 9% at the start of the year. For a full market report, see: London market close.

Over in continental Europe, the Paris Cac 40 was flat at 5,194, while the German Dax gained 14 to close at 5,947.

Across the Atlantic, US stocks fell back as stronger-than-expected home sales in February made investors nervous that interest rates will keep climbing. The Dow Jones fell 47 points to 11,270, while the S&P 500 fell 3 to 1,301. The tech-heavy Nasdaq slipped 3 to 2,300.

In Asian trading hours, oil was slightly lower, trading at around $63.80 a barrel in New York. Brent crude was trading at around $62.30 a barrel.

Meanwhile, silver hit a fresh 22-year high at $10.67 an ounce. But spot gold eased back, to trade at around $549 an ounce.

In Asian stock markets, the Nikkei 225 gained 71 points to 16,560, after yesterday's land price report showed that prices are recovering in the country's three main cities after 15 years of declining values.

And in the UK today, oil giant BP has pulled out of a joint venture to build a $3bn refinery with India's Hindustan Petroleum. A letter of intent had been signed in October with the Indian state-run company to build the refinery and a network of service stations. Reasons for the pull-out have not been given. However, other refiners in the region were recently disappointed by the Indian Government's failure to increase fuel prices (which are regulated) in its 2006/07 budget. Another case of politics and business failing to mix?

And our two recommended articles for today...

Why protectionism is the biggest threat facing the US
- If there's one thing that could send the US economy into another depression, it's a rise in protectionist sentiments, says MoneyWeek friend John Mauldin. Unfortunately, recent events suggest that this is exactly what's happening in Washington as politicians score points by appealing to voter xenophobia. But it's the US that stands to lose the most by alienating its trade partners - to find out why, click here: Why protectionism is the biggest threat facing the US

Are shares the best long-term buy?
- The latest annual study from Barclays Capital suggests that shares generally outperform bonds and cash in the long run, says Martin Spring in the On Target newsletter. But there's still no guarantee of success - equities have been known to generate negative returns over periods as long as 20 years. And generating the best returns relies on one vital investment strategy. To find out what it is, and which fund Martin believes represents a good way to gain exposure to global equity markets, click here: Are shares the best long-term buy?

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