Investors have mostly shrugged off a series of political upsets—from last year’s Brexit vote to U.S. President Donald Trump’s surprise election win. Yet these developments have long-term consequences.
There are fundamental questions about the future of the European Union (EU) and how to address the complex root causes of populism and nationalism. The UK election this week resulted in a hung parliament, with no party winning an outright majority in an outcome that will create uncertainty about the path ahead for Brexit negotiations, as we write in our BlackRock Bulletin on the UK election outcome. An increasingly transactional U.S. approach to foreign affairs, waning support for free trade and uncertain prospects for U.S. tax reform also have big and differentiated implications for economies, sectors and companies.
These topics are the subject of vigorous debate among BlackRock portfolio managers and strategists. The BlackRock Investment Institute does not have all the answers, but we share our thoughts in our new Global Insights paper Politics not quite as usual.
We delve into the potential implications of today’s political landscape for economies and markets around the world, and share the key political events, trends and risks we’re focusing on this year and next. The coming year alone brings a mosaic of elections, monetary policy decisions and political hot spots. See the map below.
Washington lawmakers face a shrinking window of opportunity to implement tax reform. Populists have been beaten back in Europe for now, and our attention has turned to improving the workings of the EU, trouble brewing in Italy and the shape and outcome of Brexit negotiations.
Europe may have its best opportunity in decades to push through reforms that make the EU more sustainable and effective. These are much needed to deal with rising populism and any economic deterioration. Potential flare-ups are Italy’s fractious politics and a possible “no deal” on UK Brexit talks. After the latest UK vote resulted in only the second hung UK parliament since 1974, we see bigger risks of an economically disruptive “no deal”—one that leaves the UK without existing trade or security agreements by the hard March 30, 2019 deadline. A minority government may be hostage to euro skeptics and others hostile to making concessions to the EU. But we also now see a wider range of potential outcomes, including a softer Brexit in light of parliament’s new makeup.
The backdrop of synchronized global growth puts central banks at a crossroads. We see the European Central Bank debating how much longer its extraordinary amount of monetary support is needed—and how to communicate any changes. The Federal Reserve is contemplating how to trim its balance sheet. We see the risks as contained, as we expect central banks to move cautiously and gradually.
China’s growth momentum has slowed as authorities are cracking down on credit excesses. These measures and other structural reforms are crucial to put the economy on a sustainable long-term path, but they bring short-term risks. Accidents can happen when liquidity is tightened in economies addicted to credit. We see the upcoming 19th National Congress of the Communist Party as a harbinger for both reform momentum and China’s ambitions on the world stage.
Mexican elections loom large on the emerging markets political calendar. We see rising risks of a populist outcome, partly reflecting the U.S. administration’s anti-Mexican rhetoric. Brazil’s government is in crisis, and early elections are a possibility. Political hot spots abound, with North Korea representing the most immediate threat.
We see diminished political risks in the short run in Europe, and potential for some growth-enhancing reforms in major economies around the world. Some of this good news is already priced in, but we expect a steady and synchronized global economic expansion to underpin risk assets for now. Read more in our full Global Insights piece.