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ChartBrief #36 Peak Political Risk?

December 11, 2016

2016 was the year of political risk.  From Trump to Brexit, China's ongoing economic and political transitions, India's demonetisation, PM resignations, leadership transitions, geopolitical risks, OPEC, central bank policy, the rise of Eurosceptic parties, hacking allegations, coup attempts, and so-on.  Many an unthinkable outcome came to pass, but the question is - have we seen a peak in political risk?  Or is 2016 simply an entree into a new regime of risk and uncertainty...

 One expression of political risk has been the uptrend and spikes in the economic policy uncertainty indexes. The graph above shows the policy uncertainty index averages for developed and emerging economies (yes political risk has been extremely relevant on both counts).

 

I put the question to my followers on Twitter and the biggest response was that political risk will intensify in 2017 (48%), and with a further 20% saying it will stay elevated, the majority (68%) expects political risk to stay high or go higher.

 I can't help wonder however if we've seen the peak in political risk, looking at the chart of economic policy uncertainty it tends to go in waves and spikes, and the old rule of thumb that high volatility is a good predictor of future lower volatility may be relevant.

 

However, many of the political risk events we saw this year were the logical result of existing trends, often economic trends. And thinking off the top of my head about some of the known risks for next year we have China's 2017 leadership transition, Trump's actual inauguration and his 100 day plan, the actual implementation of Brexit, a new Fed rate hiking cycle, ongoing geopolitical tensions, to name a few.

 

But then again, while the political risks of 2016 often resulted in a shock reaction by markets, there hasn't been a lasting impact as yet. And the reality is markets and investors deal with uncertainty and risk on a daily basis, so the follow-on question may be, even if political risk stays elevated, will it actually matter long term for markets?

 

Something to ponder... Please feel welcome to add your thoughts in the comments below, in the mean time, here's a final chart to think about:

 

 

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