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The Normalization of Political Risk

The increasingly uncertain political landscape around the world has bewildered politicians, pundits, and businesses alike. Yet, bullish equity markets and a low global volatility outlook has stumped even the most credible political risk analyst. Despite the dramatic shifts from established economic norms and political orthodoxy, particularly in the developed world, global markets have seemed poised to value certainty over risk. In the United States, the stock market has climbed despite looming changes to the country’s global trade policy and the cloud of Russian intervention during the 2016 election. The recent trend of politically agnostic investment in the developed world is part of a larger geopolitical trend that favors inaction over intervention and overlooks instability in the interest of continuity. While financial stability in lieu of political changes is a net positive, instability creates a check on irresponsible actors and incentivizes centrism. Moreover, valuing only continuity creates a discriminatory environment where political risks are tolerable in developed economies, while the developing world struggles to find investment.

Interestingly, the tide towards political populism and expediency in the developed world are reminiscent of the pink tide of populism in Latin America. And yet, the same protectionist and isolationist ideology exhibited by President Trump and French presidential candidate Marine Le Pen are indigestible in emerging markets, where a growing middle class will be driving global growth in this century. According to a PwC report published this year, emerging markets are projected to enjoy almost twice the GDP growth, accounting for 65% of global growth by 2021. In Mexico, however, the prognostic of an Andres Manuel Lopez Obrador (Amlo) presidency has investors shaking in a market hungry for investment and reform.

In developed economies, international investment and global financial performance have been a traditionally reliable metric of the electoral lifecycle of governments. However, the forecast for global volatility has not reflected the dramatic deviation from orthodoxy. A complacent investment community perpetuates uncertainty rather than eliminates it.

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