It is for this reason that, he says, the firm has very little exposure to emerging markets and very little in Europe.
“The risk with Europe is you have a rolling series of national governments that are moving decisively another way [away from closer integration] which means that the sanctity of the euro is under threat. Where before in investors’ minds there was zero risk that the euro breaks up, now it is no longer zero.”
The analysts at BAML agree that the risks are to the upside in Europe and centre around politics.
“We suspect that investors, in the wake of Donald Trump’s victory, coming just a few months after Brexit, would be even more sensitive to political risks, especially where populist movements have emerged or are entrenched. Italy – in the run-up to the constitutional referendum on 4 December – is likely to be a victim. Looking ahead, we suspect market will start looking hard at next year’s political events, first in the Netherlands in March and then France in April-June,” it said.
The bank does make the point, however, that for all the risks and populist momentum, a more isolationist, protectionist America could actually have the opposite effect on Europe – leading to political bridge building and a softer Brexit, but it is by no means its base case.
Because so little is known about what his foreign policy is going to look like and just how hard the line he is going to be able to walk will be, it is impossible to predict what is going to happen. But, what is clear is that risk levels are elevated, as are emotions and, in Europe in particular, so are the tails of many nationalist movements.
Many in the market scoffed at Trump’s rhetoric and dismissed his claims that election day in the US could be Brexit times 10. The initial market moves may not quite have borne that out, but there is clearly a momentum building and when added to the Italian referendum in December and the other elections coming up and we can no longer dismiss the notion that the sum of the parts adds up to Brexit times 27.
