Policy uncertainty might be high, but good data is more important. With the recent elections of Trump, Brexit, and other European elections, are other important ideas being pushed to the side?
Investors are having to get used to increased political unrest being a factor in their decision making. When there is a deterioration in the underlying economy, it becomes a problem for the markets. Because of some improvements in the economy, the overall markets did not drop too dramatically because of the drama of Brexit and the Trump election.
If we had been close to a recession, the market would have to taken a dramatically different turn. There is a concern for the stability of the markets when the economy is close to a recession and there is a degree of political uncertainty. When determining market pricing, political risks do have an impact; however the global economy is the most important factor.
For example, when Trump was elected, the Mexican peso and Korean won dropped in value. However, when the protectionist measures that people feared would be installed by the US were not installed, those prices went back up. Overall, the global economy has been in its best state in the past 10 years. Unemployment rates have been drifting lower over the past decade and inflation activity is picking up, which provides a lot of support for risky assets such as equities.
This economy is one of the most globalized ever. In the past five years, there has not been in a lot of global trade; however in the past six months, the amount of global trade has increased.
The continued potential of political risk derailing all of this economic growth would have to be caused by a great shock. Balancing the political risk with what is actually happening in the economy will provide a good medium.
