Retrospectives of Asia's markets in 2016 will devote space to the volatility sparked by political risk, and 2017 is likely to be no different. The source of the uncertainty this time, however, may originate in the region itself.
As Donald Trump took to Twitter to attack China's capture of a U.S. naval drone, 10-day volatility for the MSCI Asia Pacific stock index reached the highest level since the election that brought him to power. The November spike was the biggest since July, when the gauge gyrated after the U.K. vote to leave the European Union.
Those events combined with a market scare in February to make 2016 the most volatile year for stocks in Asia since 2011. Back then, again, most of the swings originated well to the west, and were due to political risk: That was the year the U.S. was downgraded by S&P Global Ratings because of wrangling in Congress over the debt ceiling, and when riots in Greece spurred fears of a European Union breakup.
That the latest bout of volatility started in Asia may provide a prologue of the year to come. While those Western political issues remain in place, investors should brace for heightened animosity between U.S. and China.
It's hard to predict whether the president-elect will be more careful in the White House than he is from the top of the Trump Tower, and how hard President Xi Jinping's administration will hit back. That's a particular concern in a year when key changes are being made to the politburo, a time the Chinese government likes to show the population that it's strong and assertive.
Japan and South Korea, key strategic allies of the U.S., inevitably will be drawn into any tensions, adding to the risk of volatility. And as with any political issues, these risks are hard to hedge.
This should trouble local and global investors alike: Even with the large swings seen in Asia, the region remained the least volatile among major markets outside North America, which means it would have been an effective hedge during both the U.S. election and the Brexit vote.
Given the latest events, Asia might climb to the top of the volatility list. Political risk, it seems, is moving east.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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