Investors tend to focus on the factors they’re most familiar with when looking
at markets. Analyzing items such as corporate earnings and economic indicators take
center stage.
The past year, however, was a vivid
demonstration that a much more difficult
to model and unpredictable force—political
risk—can overshadow typical market events.
And based on the political trajectory of the
past year, political and geopolitical risks
are likely to be even more central to market
movements in 2018. Knowing which geopolitical risks to monitor along with the usual
items, such as earnings and economics will
be key for investors in the year ahead.
The wildcard candidacy and 2016
presidential election of Donald Trump was
central to the market dynamics in 2017.
Trump’s candidacy was initially mocked, to
the point where The Huffington Post initially
refused to cover him in its politics section,
relegating coverage to its humor section.
Trump’s longshot victory lay bare how
poorly political scientists, polling models,
and pundits were equipped to read political
tea leaves. The administration’s promises of
fiscal expansion and deregulation, meanwhile, were key to driving risk assets much
higher over the year.
That same wildcard of political risk
continues to play out in the US, in the UK
with Brexit, and worldwide with the threat
of nuclear confrontation.
“Politics are clearly clouding the macro
trading environment. If it were not for the
recent set of political surprises, the US outlook
Art by Suharu Ogawa / suharuogawa.com
SCE NE
+HE AR D
Political
Wildcards
would be less dependent on Twitter alerts, the
pound a lot higher, and perhaps less concern
over a possible nuclear escalation,” analysts
at Nomura wrote in a September research
report. “The politics can really catch markets
off guard. Earlier this year, the potential of an
upset in the French election weighed on the
euro, but that was precisely the moment when
the European data picture started showing
strong upsides. And, at the start of the year,
the ‘Trumpflation trade’ was in full swing, but
the dollar lost its stride.”
The biggest geopolitical risk, however,
remains the escalation of tensions with a
North Korean regime intent on flexing its
nuclear muscle.
The stakes for markets would be
enormous. “I think it’s impossible to put a
number on the scale of the risk. But what we
can say based on the extent of the war games
exercises that have simulated what the
impact would be going back decades, is that
a conflict in the Korean peninsula would
be not only very disruptive in the region,
but could potentially lead to World War III
because of the US security guarantee, so
it would be internationalized overnight,”
Citi’s Chief Global Political Analyst Tina