Macroscope | Opinion: Political risk may be overblown but it shouldn’t be ignored
Investors and traders are growing accustomed to benign market reactions to political shocks, decreasing their sensitivity to such risks
Should international investors stop fretting about political risk?
Judging by the surge in global equities on Monday as investors rejoiced over the near certainty that Emmanuel Macron will win the run-off in the French presidential election after the centrist candidate narrowly beat far-right leader Marine Le Pen in the first round on Sunday, it is tempting to conclude that political risk is overblown.
European equity funds, which suffered a staggering US$100 billion in outflows last year as the asset class was shunned because of concerns about the fallout from the Brexit vote and the threat of a Le Pen victory, have enjoyed a steady rise in inflows since February, led by institutional investors. According to Bloomberg, net inflows into European equity funds in April have reached US$7 billion.
For fund managers who steered clear of eurozone stocks this year because of perceived political risks, the sharp improvement in sentiment – turbocharged by expectations of a Macron victory in the French election run-off on May 7 – is a salutary reminder that one can miss out on big rallies if one is too pessimistic about the impact of political developments on markets.
Indeed, this is not the first time that investor worries about politics have been overdone.
