2017 may be the ‘biggest year for political risk since the end of World War II’: Expert

Brexit. The U.S. Election. Italy's Referendum. Politics shook up markets and the world in 2016. However one expert suggests how the political risk factor could escalate even further in 2017.

"I think that this year is probably the biggest year for political risk since the end of the World War II," Brian Klaas, fellow in Comparative Politics at London School of Economics, told CNBC Wednesday.

"I think because there are so many moving parts at once, that it's going to be very difficult to control them."

Even though they happened in 2016, events like Brexit and the U.S. Election could trigger more questions and uncertainties for the world going in to 2017.

Not only are leaders and investors waiting to see what kind of "Brexit" the U.K. will get in its negotiations with the rest of the European Union and the outcome of several key elections in 2017; but the world is in limbo over what will happen when Donald Trump takes to the White House.

"You're going to have probably unrest in the U.S. – people are not just going to roll over and accept some of the changes that are occurring. You're having a president who is extremely willing and I would say reckless at poking a sleeping dragon in China, on the global stage," said Klaas.

Expanding upon the U.S.' relations with other countries, Klaas went on to add that a global re-balancing of power that involves Russia and the U.S. becoming a lot friendlier, could create "so much volatility and change in the rest of the world, that it would actually potentially become extremely disruptive and create risks elsewhere that were not anticipated."

Markets response to political change

Despite 2016's turbulence, the markets rallied on the prospect that Trump would boost inflation and help support the U.S. economy – even though a win by Hillary Clinton was initially priced in.

"I think since the Trump election, what we've had is an increasing tendency by the market to price in all the positives and completely discard any potential negatives that come along with a Trump presidency," Vasileios Gkionakis, head of global FX strategy at UniCredit, told CNBC Wednesday.

"My view on Trump is basically there are a lot of unknown unknowns for the Trump presidency, but I may be wrong about this thing, and it could turn out to be something fantastically good for the U.S.," said Gkionakis, adding that the market had not "stopped to take a breather" and reassess the chance that something may go wrong.


While politics are expected to be part of the overall market picture in 2017, Michael Livijn, chief investment strategist at Nordea, told CNBC via email that long-term risk premiums were determined more by factors such as economic growth, company profits, valuation and yield levels.

"True, politics is part of picture, but in the case of 2016, I think that in relation to miles written about the U.K. referendum, and especially the U.S. election, real impact was less than the height of the headlines. It took the markets three days to shake off Brexit, three hours to shake off Trump and three minutes to dismiss the Italian referendum," Livijn added.

"Since the focus is so great on politics at the moment, I for one think that focus will continue during this year, especially in Europe. But again, how much is "noise" and how much is real impact?"

"In that sense, perhaps part of the risk is that markets are too focused on politics, and decides that an outcome in some political event is bad, and we get a sell-off. Question then is if it was the political event or markets themselves that caused the correction?"

As investors prepare for another year, Nordea's Livijn said that investors should start the year with an overview of their portfolio, to ensure that it's consistent with their strategic allocation.

"When that is done, go out and face the new year. It will be a year of political events, but also a year filled with economic data, reporting seasons, central bank meetings, yields fluctuating and numerous things we haven't even thought of! Those short-term drivers, and how you interpret them, will guide your tactical allocation (if you have one)."

Justin Tallis | AFP | Getty Images

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