Are markets ignoring political risk?
The FT’s Roger Blitz and Valentijn van Nieuwenhuijzen of NN Investment Partners explain how policy uncertainty might be high but good data are more important for markets. Markets are not ignoring political risks – they are pricing them in segments.
Filmed by Alessia Giustiniano and Petros Gioumpasis. Edited by Felline Reyes.
Are we worrying too much about political risk? Is all the talk about Trump and Brexit and European elections drowning out the quiet improvement in the global economy? With me to discuss this is Valentijn van Nieuwenhuijzen from the Dutch fund, NN Investment Partners. Valentijn, are investors, do you think, getting now used to all this political risk?
I do think there is a sense of getting used to it. I mean, we've had-- we had Brexit. We had Trump last year. But don't forget, we had a whole European crisis before that having a big impact on markets. So yes, investors are getting used to it, but still sometimes exaggerating the degree of importance.
Show me in your first chart how we are kind of missing the point about the global economy.
Well, you know, what I try to point out here is that, in the blue line, you see assessments of policy and political uncertainty jump up and down. But it's really only when it's in combination with a deterioration in the underlying economy that it becomes a problem for markets. And if you look more recently, you actually see the data surprises have moved up, and thereby compensated a lot for the political uncertainty on the back of Trump and Brexit, which didn't translate into economic drama.
This would be really more problematic if we were in a recession, or getting close to a recession.
That would be a whole different ballgame. That's the point. You know, we've seen that after Lehman. We've seen it in the euro crisis, when, really, the economies were heading into a recession and you had a lot of political uncertainty. That's when markets get concerned.
OK, chart number two is about how investors are pricing in political risk. Show us about this.
Yeah, because, I mean, it doesn't mean that markets are complacent and ignoring the political risks that are out there. It's just other things are more important. The global economy is the most important. What you see here is that the spread in the blue line-- sorry, the evolution of Mexican peso, Korean won in a joint index has been very sensitive to the election of Trump. So they weakened a lot when Trump was chosen, and then came back a little bit because, eventually, the protectionist measures that we feared Trump would instal have not yet been installed, and might not happen.
So how do we weigh up the underlying strength of the global economy? Give us a bit of perspective in your next chart about how good this economy is looking.
Well, I think what is being overlooked sometimes by discussing all this political drama is that the global economy is in its best state in the last 10 years. When you look at where unemployment rates are, for example-- the red line, G3 unemployment rate, the US, Europe, and Japan, it's been drifting lower. It's at its lowest level since 2009. Also, inflation is finally picking up. The level of activity-- it's all, combined, clearly the best state of the global economy we've had in the last 10 years, and that's providing a lot of support for risky assets like equities.
Despite all the talk about protectionism, this is still a globalised economy, isn't it?
It is a more globalised economy than ever. And what is really important there, obviously, is also what is happening to global trade. And that is also an element which has been surprisingly weak in recent years. We've not seen a lot of business investment and not a lot of global trade. And now also, there, we're seeing signs of life. Global trade is jumping up. You see it in the red line in the graph. But also, business advancement indicators clearly moving up over the last couple of months. Next to stronger consumption, that provides a lot of help for growth in 2017.
Just finally, Valentijn-- therefore, what is the prospect still of political risk derailing all this great growth?
Well, at least you can say that the solid underpinnings in the global economy require a really strong shock. The Dutch-- the Dutch elections would never, even if they were different, would never have created that shock. You need a very strong shock. You cannot ignore political risk, but please balance it a bit better with what is actually happening in the economy.
Valentijn van Nieuwenhuijzen, thank you very much indeed.