The tables have turned.
The U.S. and Europe, for decades bastions of political stability, are now exporting political risk to the rest of the world .
That's the takeaway from Bloomberg's annual survey of 146 analysts, economists and strategists. The question: What worries for the coming year keep them up at night? The findings here also informed Bloomberg's annual Pessimist's Guide.
The U.K. vote to leave the European Union and Donald Trump's electoral victory, which jolted the geopolitical firmament this year, are just two examples of the traps waiting for investors as uncertainty shifts from frontier and emerging markets to the world's advanced economies.
Pessimists have much to choose from in the coming year, all over the world. Here are our findings by geographic breakdown.
After the Brexit vote this year, Europe may deliver more blows. Projections by risk analytics firm Verisk Maplecroft on government stability over the next three years show Greece as the biggest cause for worry on the Old Continent. Other countries that raise a red flag are Poland and the U.K., where populist causes have recently triumphed.
The Bloomberg survey identified a spate of coming elections in Europe, including in France and Germany, that are seen as similarly worrisome as President-elect Trump's foreign policy. A closer look at respondents' answers revealed that many are bracing themselves for the possibility of early elections in Britain.
For Enver Erkan, an economist at Reel Kapital Securities in Istanbul, the likelihood of political unrest in Europe remains the top risk without question. More specifically, he anticipates a government crisis in Italy and the risk that anti-immigration politician Marine Le Pen will become the next French president and impose her anti-European Union and anti-globalization agenda.
Uncertainty over Trump's future policies was identified as the single biggest threat to global security by 38 percent of survey respondents. His proposed border wall with Mexico is seen as one of the campaign pledges that is least likely to become reality. While tariffs on Chinese imports, an end to NAFTA and millions of deportations are all considered somewhat probable, the experts were overwhelmingly convinced that Trump will deliver on tax cuts.
For Alison Graham, chief investment officer of Voltan Capital Management, the biggest risks in 2017 will result from the vacuum Trump leaves by abandoning the role of the U.S. as a moderating force in diplomatic conflicts. In her own words:
"Russia and China have interpreted the Trump election as an opening to pursue their regional interests more aggressively. Countries in Europe and the Middle East will both feel and create greater instability as they are forced to take military security into their own hands. Trump's tendency to personalize and escalate conflicts will create a sense of ongoing global crisis."
Asia and Middle East
Protests in Hong Kong and the possibility of North Korea lashing out topped the list of concerns in Asia. A military standoff in the South China Sea also featured prominently. Shlomo Maoz, chief economist at S.M. Tel Aviv Investments, said he could envisage a small-scale naval incident between Chinese and Japanese forces or a bigger conflict that would embroil the U.S., Vietnam and other regional players. A sharp economic slowdown in China linked to a power struggle should also not be discounted.
In the Middle East, a hot spot for decades, there is one specific scenario that spooked our experts most: Crude prices surging over $100 when the decades-long proxy war between Saudi Arabia and Iran, two major oil producers, finally flares into the open. Here is Bernard Baumohl, chief economist at The Economic Outlook Group:
"There is major concern that a real eruption could mark a turning point for the ruling House of Saud. Any notion that they are losing control will cause the markets to add significant premium for oil markets because the Saudis are seen as the calming force. Iran, well, has no interest to see prices this low."
Black Swans Ranked
We asked experts at Nightberg, a New York-based independent global macro research firm whose clients include hedge funds, to weigh in on our Pessimist's Guide and assess the varying likelihood. Here is a recap of their input.
Birgir Haraldsson, co-founder of Nightberg, had this to say about next year:
"Political risk is no longer the domain of emerging markets alone as we know from 2016. Chances are this political volatility trend intensifies in 2017 as the European calendar is loaded up with event risks."
--With assistance from Sangwon Yoon