Macroscope
by

High stakes politics might mean 2018 is a year of living dangerously

As risk-taking turns to risk-aversion, investors will opt for safer-haven plays, bringing money back home into domestic coffers. And emerging markets could be in the firing line

PUBLISHED : Monday, 08 January, 2018, 9:13am
UPDATED : Monday, 08 January, 2018, 10:52pm

The proverb ‘All’s well that ends well’ is a pretty apt description for the passage of 2017 into the new financial year.

Last year finished on a strong note with global markets hitting record highs amid a strong sense of optimism the trend could extend into 2018.

The proverb means problems occurring along the way do not matter as long as the outcome is a happy one, except there is a caveat. Unless the market fully factors in all the nascent risks 2018 could turn into a comedy of errors.

There are too many uncertainties for markets to turn a blind eye. Many of them revolve around US President Donald Trump’s troubled presidency.

Sure, he has filibustered through his hallmark tax reforms, but he has a whole host of other pressing problems to deal with. A collapse in his political ratings, possible impeachment proceedings along the way and a ‘bigger button’ battle of wits with North Korea threaten to besiege his presidency in the coming months.

While US practices a more isolationist approach to global diplomacy, the emergence of China and Russia is re-drawing the world’s power map.

Growing tensions in the Middle-East between Saudi Arabia and Iran fighting a war by proxy in Yemen and the three-way tussle between the US, Russia and Turkey over Syria raises the odds of escalating into a much graver crisis. Higher oil prices are simply waiting to explode into higher global inflation pressures. Bond markets beware.

Politics are the wild card for investors this year. The vagaries of Trump’s presidency are simply one facet of what could turn into a roller-coaster ride for investors and it is the toughest one to put into hard numbers.

Markets are sitting on a comfort blanket rather than a tinderbox judging by extremely placid market fear gauges like the S&P Vix volatility index and ultra low credit spreads.

The market’s perceived faith in global stability seems much more to do with the flush of cheap and easy central bank money sloshing freely around than a solid sense of confidence that all will come right in the end.

The growing crisis in the earth’s eco-structure, the worry that excessively loose central bank policies have over-bloated a zombie global economy and the spectre of deep-rooted political risks should be feeding a dystopian vision of the world rather than glossy view that everything will be fine in the face of extreme adversity.

It is not just the possibility that markets are understating risks but maybe other threats are being overstated. In Europe, investors are wringing their hands over the imagined fallout from Britain’s Brexit woes, not least the perceived damage to future trade flows, jobs and growth.

But there is the alternative scenario that UK Prime Minister Theresa May’s days are numbered and the return of a pro-Europe, radical Labour government could be on the cards. That’s food for thought.

The million dollar question is how do investors cope? Should they bury themselves in cash-lined concrete bunkers or go with the flow until the alarm bells sound? The answer is to start reining in more bullish tendencies now

Another European wild card scenario is Theresa May could even outlast German Chancellor Angela Merkel whose centre-right German coalition government is looking more fragile by the day. If public opinion sours and the ultra-right Alternative for Germany party begin to make stronger gains in the German polls, the fail-safe, baseline assumption of European unity goes up in smoke. Even France’s President Emmanuel Macron recognises that particular risk.

It all underlines that in 2018, anything is up for grabs in the world of politics and investors need to make sense of it very soon. Either world markets are on their way to investment heaven or hurtling towards investment hell in a hand basket. The coalescence of less certain economics, tighter monetary policies and more edgy politics could turn things very nasty in the next few months.

The million dollar question is how do investors cope? Should they bury themselves in cash-lined concrete bunkers or go with the flow until the alarm bells sound? The answer is to start reining in more bullish tendencies now. As risk-taking turns to risk-aversion, investors will opt for safer-haven plays, bringing money back home into domestic coffers. Emerging markets could be in the firing line.

US mutual funds repatriating money back home will boost the dollar, but Japanese fund repatriation could provide an even better opportunity for a much stronger yen. It would be 2008-2011 all over again. For the unwary investor, 2018 could be the year of living dangerously.

business-article-page