New political threats for investors to worry about
INVESTORS now have to acknowledge a new set of risks tied to socioeconomic concerns that go far beyond the realm of traditional geopolitical hazards and have the potential to roil economic activity and financial markets. The confluence of these new and old political risks threatens to undermine progress made through globalisation and foster a rise in conflict between, as well as within, nations.
That’s the ominous conclusion of Citi’s team of analysts, which includes chief global political analyst Tina Fordham, managing director of global strategy Mark Schofield and global head of commodities research Edward Morse. They joined forces with Jan Techau, the director of the Carnegie Europe think-tank, for a report on global political risk.
Traditional geopolitical risks like armed conflict and newer socio-economic risks like income inequality, which Citi calls “Vox Populi risks”, threaten to intersect “in an environment where global growth is stagnating while public expectations remain high and government capacity to effect positive change through reforms is low”, write Fordham and Techau.
Thus far in 2016, however, traditional geopolitical tensions – notably, between Saudi Arabia and Iran – have not translated into meaningful financial market shocks.
Monetary policy
Accommodative monetary policy has kept financial markets from reflecting the brunt of geopolitical tensions, Schofield claims. The stimulus deployed by the Federal Reserve and other central banks in the wake of the financial crisis had the effect of, among other things, putting downward pressure on risk premiums. The danger now is that the Fed is beginning to withdraw this accommodation at the same time political worries mount, which could amplify any declines in risk appetite.
“There is an increasing likelihood that new transmission mechanisms are evolving that could lead to political risk having an impact on economic forecasting models, changing the way that companies do business and driving a secular, or even structural, increase in risk (premiums) in financial markets,” asserts Schofield. “Political risk can quickly and meaningfully alter return expectations across asset markets where transmission mechanisms are established in economic channels.”
Globalisation has connected economies – but it’s also opened up more avenues for political strife to destabilise this activity.
The erosion of America’s global standing and the relative toothlessness of international institutions has resulted in the “Great Power Sclerosis”, according to Citi, which has made preventing and resolving regional and local conflicts more difficult. To compound concerns, largescale governance uncertainty is not the sole domain of emerging markets, as the government shutdown and frequent debt ceiling debates in the US, as well as the rise in fringe, populist (and sometimes separatist) parties in EU member states, demonstrates.
Political events could have an impact on commodity prices, while sanctions, stemming from the failure of diplomacy to bridge socio-economic chasms, could damage select economies’ outlook while brightening others.
The four “hotspots” in which Citigroup sees traditional geopolitical and new socioeconomic risks converging and evolving are a return of the euro crisis, continued turmoil in the Middle East, friction between Asian behemoths, and the fallout of the new oil order. – Bloomberg