Political risk is a known unknown
- Political risk is a known unknown. Political uncertainty is an unknown unknown. Traditional policy processes and communication channels are not being followed today, causing uncertainty.
- Investors assumed President Trump would differ from candidate Trump – extrapolating from past experience. That extrapolation may be unwarranted. However there are two things that mitigate US political uncertainty.
- Politicians are not as important as they think. Politics influences trend growth, but the near-term economic consequences tend to be more limited. Economic growth was resilient in the face of political shocks during 2016. In the US, there is also greater certainty about Congressional processes (which should be more conventional). That is a check on overall uncertainty.
- Investors still need to consider uncertainty. Trade protection is an uncertain policy that does have near-term consequences, and where the president can act without Congress. Portfolio diversification is critical to managing the uncertainties of the new abnormal.