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2018 Mid-Year Outlook Political Forecasting

2018 Mid-Year Outlook Political Forecasting

POLITICS

Risks from Uncertainty

Key Takeaways

  • Political risks look likely to remain in the second half of 2018 although recent geopolitical tensions have had limited effects on markets in 2017. Historically, geopolitical events have not caused a synchronized and sustained sell-off in financial markets. In fact, attractively priced financial markets still perform, benefiting investors with diversified portfolios.
  • Regional economic crises rarely reach a global threshold. In the case of either a real economic contraction (such as the Eurozone crisis of 2011-2013) or merely a feared one (Brexit), these events usually remain contained within the local region.
Political Outlook and Political Forecasting 2018 - Market Insights by Citibank UK

Some of the main political signposts and geopolitical risks that could move markets in the second half of 2018 include:

US

  • US-China trade tensions continue. Though not Citi’s base case, Citi analysts believe a trade war may cause significant damage to both economies – especially as China is willing to take significant measures to narrow the trade deficit.
  • Citi continues to anticipate NAFTA may be ratified this year, but acknowledge rising risks to completion. NAFTA 2.0 ratification may be impacted by: tight legislative calendars, elections in the US and Mexico, business scepticism, and even walk-outs during the negotiations.

North Korea

  • Citi continues to expect positive economic impact to be limited in the short term as the US-North Korea summit produced an agreement that lacked details – North Korea pledged to work towards denuclearization but without details or a timeline.
  • The US may not lift economic sanctions quickly. Economic transition in North Korea will require foreign government-backed investments, which take time to flow in.

China:

  • Tensions with China may arise in the South China Sea with Japan over Taiwan or even with US assets in the region.
  • Citi expects further US sector-specific trade negotiations and the effects of rising protectionism can be significant for small open economies. However, China’s trade connections to the world and domestic economic strength suggest it could endure through US trade threats.

UK:

  • The UK may run an early election or could fail to agree a Brexit transition deal for the time when it exits the EU in Spring 2019.
  • Citi Analysts suspect that a hard Brexit may not only be a concern of the UK, but would also hurt the EU more than currently expected. A new UK election could also have significant implications for the UK and Brexit outlook.

Italy:

  • Having a government in place is a step forward for Italy, however, the government’s structural and fiscal policy platform could undermine the cohesion of the euro.

Middle East:

  • Tensions could escalate in Syria, between Turkey and Iraq, Iran and Saudi Arabia, in Egypt, Yemen, or around Israel.
  • Citi believes that if the turmoil includes major oil producers, oil prices could spike. Otherwise, the geopolitical risk premium would rise further, but the initial effects may be fairly localized.

Regional economic crises very rarely reach a global threshold. In the case of either a real economic contraction (such as the Eurozone crisis of 2011-2013) or merely a feared one (Brexit), these events usually remain contained within the local region.

 

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