Credit Suisse Launches European Political Risk Barometer
The current year we will see several elections held in Europe. With voters going to the polls there are many uncertainties associated. Investors should keep an eye on the political calendar. The European Political Risk Barometer developed by IS&P will support them to do so.
There are several important elections in Europe this year. The French and the Dutch will hit the polls in spring, the Germans will follow in autumn. Measuring political risk in markets is difficult, not just in terms of quantifying but in identifying when and to what extent markets react to politics.
Credit Suisse's European Political Risk Barometer outlines three possible scenarios that capture the way in which the upcoming elections, the saga that is Greece and, of course, Brexit may impact market prices.
- According to the first scenario, 'Ode to Joy', political situation in Europe is stabilized, equities do well, especially small and mid-caps, as do banks. Bund yields rise and a mid-year tapering debate elevates the euro. According to the framework, the markets are already 'close' to this scenario in terms of pricing.
- In the second, more middling 'Riddle of the Sands' scenario, current valuations and positioning leave little room for 'scares' and, as such, our indicators point to some downside in equities and periphery risk. Quality, core assets outperform the periphery (e.g. banks). Divergence between hawks and doves at the European Central Bank (ECB) increases, and taper talk is a growing risk for the euro
- Most pessimistic, yet unlikely scenario, is called 'Inferno'. This involves another lapse into the EU and euro crisis. In such a case, equities, small caps, credits, bank securities and periphery debt are under pressure. Bunds and select other 'core' bonds rally. The curve flattens. The euro dips below parity, but only just as the ECB's contribution is limited by moral hazard. This scenario is not at all in the price.