Trump victory sends markets haywire, extending the rise in country risk

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By:
Jeremy Weltman
Published on:

Investor risk has been rising this year with fears over Brexit, China, the oil price slump, eurozone debts and global conflict weighing heavily on portfolio decision-making. The shock impact of the Republican victory has made the picture even murkier and sent assets into a tailspin.

Donald Trump fire-600

Eight years on from the global banking crisis, and six years since the sovereign debt aftershock, global risk investor risks are heightening as the political shocks keep on occurring.

No fewer than 97 of the 186 countries included in Euromoney’s country risk survey have become riskier this year – their scores falling on a range of concerns, one of which has been the uncertainty of the US elections, so soon after the UK’s decision to leave the European Union.

The US, lying 15th in Euromoney’s global risk rankings, has seen its score flag, and is one of many large investor markets flinching in response to geopolitical developments, policymaking uncertainty and other concerns a Donald Trump presidency might bring.

The financial markets are in a panic as ‘false-betting’ positions are unwound, after an extended period of increased risk, with questions arising over what a Trump presidency will mean, for the US, Europe and the world.

The markets will be eyeing closely every move, his choice of advisers and ministers, and for any clarity on his political and economic agenda.

His victory, following Brexit, gives a sense of the anti-establishment populism affecting the world, which has been contributing to the rise in political risk.

That might increase the prospect of the populist-right winning elections across Europe, and causing the European Union to fragment.

Warning signs

However, no one can say they weren’t warned.

The mean-average political risk score for all 186 countries in Euromoney’s survey has been on a perceptible decline since 2012 – where a lower score equates to higher risk.

Policymaking implications and the effect this all has on confidence mean that economic risk has followed a broadly similar trend.

This, at a time when commodity prices are depressed and conflict is raging in the Middle East, putting governments under pressure from the fiscal squeeze.

Major commodity producers, including Nigeria, Congo Republic and Azerbaijan – adjusting to the fiscal realities of persistently low oil prices – have seen large falls in their risk scores.

So, too, have Brazil, China and Turkey, alongside many others where the economic risks are compounded by the political threats – among them are Italy, Poland and the UK.

As ECR stated only last month: “[With] a referendum looming in Italy, elections in the US and Europe to come, not to mention frail banks and several countries mired in difficulties, it might be the calm before another global storm.”

ECR contributors have their say

Economists taking part in the survey are taking stock of what it all means.

Among the initial reactions:

Handelsbanken economists say: “Trump’s political agenda is revolutionary. He has been relatively consistent on three major issues: he is against immigration, wants to implement high tariffs on imports from Mexico and China, and plans to carry out large tax reductions.”

Mexico’s risk score had been improving, but the peso has fallen sharply and economists are likely to revisit this. China was already struggling for a convincing message as concerns over its economic growth trajectory and rising debts questioned its safety.

And from Commerzbank: “For the markets, Trump’s victory is a far bigger problem than Brexit.”

Big tax cuts and more money for defence “would imply an increase in the budget deficit by around 2% of GDP per year”.

On foreign policy: “A president Trump will weaken Nato, and this could entice Russia to stoke new conflicts in Europe. This is a considerable risk.”

Hold onto your hats… 2017 could prove to be a bumpy ride.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.