Rich countries increasingly resembling emerging markets

Trump’s attacks on the Fed, the Brexit soap opera, the gains of the populists in various European states show that clearly the political risks in the West have considerably increased. The question is will investors have to assess the rich countries more like the emerging markets when it comes to political developments that could undermine growth and increase the risk premium for the world’s most developed economies? That question is discussed by ECR Research in a recent report. In the past investors distinguished political risk between the rich countries and the emerging markets by focussing on the functioning, stability, and reliability of (and confidence in) institutions such as parliament, the courts, the police force, and so on. Therefore, the political risks in the rich countries were, safely assumed, to stay within fairly narrowly defined bandwidths: some more tax cuts here, somewhat wider deficits there, slightly more support for free trade, etcetera. Comparatively, there tended to be far more fluctuations in the emerging economies due to nationalisations, expropriations, sudden exchange rate changes, etcetera. Not to mention revolutions and (civil) wars. But these assumptions are being challenged now, and the political oscillations and the bandwidths that delineate policies and politics are gaining momentum in the West, say ECR. For instance, the seizure of power by populist movements in countries such as Italy, Donald Trump’s election, Brexit, and the fragmentation of the political landscape in many Western democracies point to a growing (potential) impact on the underlying financial, economic, and market conditions of political developments.