As the year draws to a close, strategists are busy crunching the gross domestic product and earnings numbers to give a sense of trends investors should watch in the new year.
Over the years, one factor has begun impacting markets in a big way — political risk. Half the top 10 single-session moves since October 2012 in the world markets have been due to political developments.
A hung Italian parliament and the US decision to taper its bond buying programme evoked a stronger response from markets than any other macroeconomic development. While political risks in 2013 were relatively lower, compared with 2011, there were plenty of bombs that did not go off, like an US attack on Syria, China’s hard landing and collapse of the Euro zone.
A lot has been happening in developed and emerging markets, as the middle classes are increasingly unhappy with a lack of reforms and the political morass that afflict both. This disillusionment has resulted in a multitude of changes on the political front like the birth of new parties, which has accelerated the risk of political instability. While this trend is here to stay from Italy to India, there are political milestones with the potential to disrupt markets in 2014. Tina Fordham, chief global political analyst at Citi, believes most of these risks have the potential for a replay or relapse.
So, what are the political events investors should watch for in 2014? The first and obvious one is the US budget and debt ceiling increase, likely to come up between January and February. The increased polarisation in US politics could make things difficult for the Obama government. The credit crisis of 2008 has led to a sharp fragmentation of people and their thinking, as growth has come off and the middle classes are increasingly dissatisfied with the political establishment.
Globalisation and open markets were major drivers in the pre-credit crisis era but life after isn’t so simple. Disenchantment with the elite and political class has resulted in the rise of new or alternative political parties but this also brings the risk of political instability.
The other big factor to watch is the deal with Iran, which expires in the middle of 2014. Also, the disarmament of Syria isn’t yet done and that could come with its own challenges.
While developed countries have their own challenges, five emerging markets are headed for elections in 2014. Though equity markets bet highly on the Bhartiya Janata Party’s prime ministerial candidate, Narendra Modi, the risks remain of a hung parliament, thanks to the rise of an alternative like the Aam Aadmi Party.
