Tina Fordham, managing director and chief global political analyst at Citi, watches how geopolitical and socio-economic risks can impact the markets.
She recently spoke with Business Insider about how political risk analysis has changed, the uptick in political uncertainty in the US, and new sources of political risk.
This interview was lightly edited for clarity.
Elena Holodny: What’s the one thing you always keep in mind when examining geopolitical and socioeconomic trends?
Tina Fordham: One of the important factors to keep in mind is the direction of travel for a key indicator, such as a leader’s approval ratings, whether strengthening or declining and the rate of the change — or whether they hold broadly steady, as in the case of Russian president Vladimir Putin.
So, for example, when we look at German Chancellor Angela Merkel’s approval ratings after three terms in office, they remain enviably high, a remarkable achievement for a leader of an advanced economy. Consider what has hurt her otherwise strong approval ratings the hardest — not the unpopular bailouts during the euro crisis, but rather the refugee crisis. In the midst of the peak of the refugee flows, in the late summer and early autumn of 2015, her ratings sank the hardest and fastest of her time in office. Notably, the refugee crisis hurt Merkel’s ratings more than the widely unpopular Eurozone bailouts.
But in our view, she is still likely to be re-elected to a fourth term as chancellor, as her competitors trail behind. As Europe’s political backstop, Merkel’s leadership is a critical component to EU political stability.
Holodny: Last January, you drew a distinction between “old” geopolitical risks (military build-up, proxy wars, failed states) versus the “new” socioeconomic risks (Vox Populi, declining trusts in elites, income inequality, referenda). To some, it might seem intuitive that geopolitics presents a greater risk, but could socioeconomic risks present the bigger challenge? How?
Fordham: This question really gets at the heart of the changing nature of political risk. When I first started my career, in the then new field of financial markets political analysis, in the late 1990’s, the themes that were most in demand were either geopolitical risks — primarily those likely to impact oil prices — and the political transitions that were bringing in new governments and policies in large EM transition economies like China, Russia, Brazil and South Africa.
Both for 2016 and 2017 — for the first time — we highlight political risk in advanced economies as the top political risk for investors, a significant change in trend. In 2016 we flagged the risk of Brexit and Trump as our top Global Political Risks. For 2017, we highlight the continued evolution of the Brexit process plus the US regime change as well as a constellation of systemically significant European elections. These are scheduled in France, the Netherlands, and Germany, but we’ve also flagged the potential for early elections in the UK and Italy.
We also need to be prepared for new sources of political risk. The allegations of foreign interference in the US election have prompted concerns of interference in other strategically significant elections in Europe this year. Such developments can not only generate surprises and impact final outcomes but also cast additional strain on public trust in democratic institutions and processes.
Finally, however much markets may be welcoming Trumponomics, Donald Trump’s Twitter account could well be one of the bigger and more unpredictable sources of political risk for markets in 2017. With 140 characters, any time of the day or night, Trump can make statements that hurt a company’s share price or prompt a change in strategy, spark confusion amongst foreign leaders or spook allies.
Holodny: How should we adjust our thinking about old geopolitics and new socioeconomic risks in a world where we see more and more problems with global governance (ex: failed states, the rise of non-state actors, a fraying EU, etc.)
Fordham: Poor governance has always been a major source of underlying risks, most closely linked with civil war, cross-border conflict and state failure. Until recently, the consequences of poor governance have largely been country-specific or regional.
The refugee crisis — a culmination of conflict, state failure and failed nation-building efforts — changed that, opening a new channel for transmitting political risks from the Middle East, East Africa, the Balkans and Afghanistan to the towns and suburbs of developed Europe. We stated then that the refugee crisis was evidence of a new channel opening to transmit political risk from regional to systemic. In the past, the two primary transmission mechanisms had been a growth shock or an oil price shock.
Holodny: One of your big “new socioeconomic risk” themes is the Vox Populi risk, which refers to shifting and more volatile public opinion that poses ongoing, fast-moving risks to business and markets. We saw this in the US elections this year. What might this development mean for the US longer-term?
Fordham: The mutation of Vox Populi risk from a largely EM phenomenon — think Arab Spring and the Russian, Brazilian and Indian mass protests between 2011-2013 — to a DM phenomenon has important consequences that have yet to be fully realized.
Most observers of the US political outlook take comfort in the strength and independence of US political institutions, the system of checks and balances, an independent media and a strong civil society. Yet following his Twitter criticisms of Fed Chief Janet Yellen, the CIA, the New York Times, and even companies like Boeing, Trump seems determined to re-write the rules of the game and overturn decades of political convention.
Some think this is just what the US needs, others fear the chipping away of cherished institutions. Time will tell. Political risk and policy uncertainty are on the rise in the US, though judging by the market response, most investors have chosen to focus on the potential for deregulation, tax cuts, and fiscal expansion alone.
Holodny: But the US isn’t the only developed market seeing this trend, although it’s certainly different in each country. What might the Vox Populi risk mean for the upcoming French and German elections internally and for the Eurozone more broadly — especially given that both countries are the pillars of the eurozone?
Fordham: See above for most of the answers, but France will be particularly in focus because of the implications of French elections far beyond the country itself. It is possible to imagine the EU without the UK, Greece, and even Italy — though “Ital-exit” would likely be a significant economic and currency shock.
The EU would not continue to exist in its current form in the event of a French exit — the platform that the Front National (FN) [led by Marine Le Pen] are running on. A Le Pen victory is not our base case, but the advance of Vox Populi risk and its mutation into advanced economies means it cannot be ruled out.
We advise investors not to focus on base case scenarios and instead consider the consequences of what we used to call “tail risks” in more depth.