It’s not the overdone media coverage, or that you’ve read too many columns by MarketWatch’s Paul Farrell, who says: “We live in a noisy, new world filled with rage.”
There actually is increasing unrest worldwide, according to a new report by Citi’s chief global political analyst, Tina M. Fordham, and Willem Buiter, the bank’s chief economist, as well as other analysts.
The report’s authors say they’ve found evidence of a “dramatic and measurable increase in the number of elections, mass protests and government collapses over the past three years – a 54% increase versus the previous decade – as well as a proliferation of new and fringe political parties, many of which are anti-establishment.”
The analysts dub this “Vox Populi risk,” and they say global markets seem “remarkably immune” to it for now. They add:
“This does not mean that bursts of increased political risk cannot induce bursts of global market volatility, as we are seeing with the Ukraine crisis. However, the longer-term market impact has generally been more localized. So, global investors might see the current crisis as a reason to sell Russian assets. They might even see it as a reason to sell EM [emerging market] assets. But they do not it as a reason to sell the S&P SPX . If anything, volatility in riskier parts of the world seems to be increasing the desirability of assets in the more stable DM [developed market] economies.”
The immunity could go away once developed markets no longer have extraordinarily low rates and open-ended liquidity at those rates, according to Citi. The analysts also put it this way: “Central banks have boosted asset prices that otherwise could have been damaged by high political risk premiums.”
Markets can “give a skewed perception of what matters,” the report adds. The U.S. accounts for just 6% of the world’s population, but 49% of the market capitalization for the world’s equity markets, while emerging markets provide 81% of the population, but just 10% of market cap.
The analysts write:
“So, by definition, any analysis of Vox Populi risk is going to care most about what happens in EM. After all, they are so much more of the populi. However, we think investors are going to care most about what’s happening in DM economies and the US in particular. That’s why it’s easier to see the impact of the Lehman crisis … than the Arab Spring. Investors are doing what comes naturally – worrying about what matters to them.”
Citi emphasizes that global markets’ gains are contributing to income inequality — and therefore rising unrest.
And in emerging-market nations, resentment of crony capitalism has emboldened government efforts to breakup monopolies, so shareholders in affected companies “could lose out alongside the oligarchs,” the analysts say.