How Political Risk Is Shifting to Developed Markets

For a long time, political risk took on different meanings whether you were investing in developed markets or in emerging economies -- with the robustness of institutions as the major differentiator. In the past eight months, however, the distinction has become a lot less stark, as a growing number of investors started to wonder how best to respond.

For investors in developed markets, political risk has usually been contained to changes within relatively narrow bands that revolved around the policy stance of governments toward budget deficits and composition, deregulation and, at times, trade and capital liberalization. To use economist lingo, it was about movements along curves, rather than a major step-shift in these curves.