Risks are Heightened

Key Takeaways

• Over the last year or so, uncertainties have piled on: Brexit delays, trade tensions, recession chatter, impeachment escalation, oil-market disruptions, and geopolitical risks.
• Political fears are driving idiosyncratic risks in particular markets, thus Citi analysts see this as a good time for many investors to reassess the value of global diversification.

Some of the main political signposts and geopolitical risks that could move markets in 2020 include:

US

• On 4 April 2019, President Trump gave Mexico a year’s notice to stop drugs and help on immigration or face tariffs on its exports of autos to the US. Other non-tariff barriers like additional screening or regulatory checks to increase the cost of importing goods could also be implemented. As long as the emergency at the border remains active, the threat of tariffs could remain if the US judges that Mexico is not keeping its current efforts to deal with illegal immigration flows.
• Trade tensions with the EU are likely to rise, as aircraft tariffs are implemented in addition to other potential catalysts on the horizon (auto tariffs). The US has also proposed import taxes on US$2.4bn worth of French goods in retaliation for the country's new digital services tax. Trump administration is considering opening investigations into digital services taxes of Austria, Italy and Turkey. Separately, a US-Japan trade deal in-principle has been announced in the UN General Assembly in September 2019, however Citi analysts expect the auto tariffs threat to remain after this deal as the US could use it as leverage for second-stage negotiations.
• The next US presidential election is scheduled for 3 November 2020 and this will be the 59th election since the first in 1788. Only 3 modern US presidents have failed to secure a second term, and President Trump benefits from both incumbency advantage and the strong US economy. However, given his comparatively low approval ratings, he could be vulnerable to a Democratic ticket generating strong voter enthusiasm. The impeachment inquiry adds to further risks.

North Korea

• Leaders of US and North Korea held a first, landmark summit in Singapore in June 2018 and agreed to improve relations and negotiate an end to North Korea’s nuclear and missile programs. The efforts have made no substantial progress and their second summit hit an impasse in Vietnam in February 2019.

China:

• On 12 December 2019, US and Chinese officials announced that they had finally agreed to the Phase one agreement. China agreed to billions of dollars in agricultural purchases from the US, while President Donald Trump has promised to reduce some tariffs.
• Citi analysts believe that while there is a Phase one deal, trade tensions are not over. Uncertainty on achieving the Phase two deal (mostly on technology and the potential to reduce sanctions on Chinese technology companies) and national security considerations ahead of the 2020 Presidential elections is likely to remain. .

Hong Kong:

• Nearly half a year of protests have put a strain on Hong Kong’s economy. 4Q GDP is likely in the third quarter of decline, after 3.6% cumulative drop in 2Q-3Q. Retail sales are down 20% from a year ago, while tourist arrivals collapsed 35%. These declines are the worst since the SARS crisis in 2003. Yet, unless a solution is found, even more is at stake, which may cause spillovers to broader regional and even global financial markets.

UK:

• Prime Minister Boris Johnson and his Conservative Party secured a landslide victory in the British general election on 12 December 2019. That would give the new government sufficient parliamentary support to pass its EU Withdrawal agreement ahead of the end of the new extension period to the UK’s membership on 31 January 2020.
• Relief about an orderly Brexit and a generally pro-business government should allow an initial confidence rebound. But the reality of hard-but-smooth Brexit could weigh on investment from 2H 2020, particularly if the government fails to request a longer transition period by 1 July 2020. .

Europe:

• Italy: Populist (M5s) and centre-left (PD) politicians in Rome recently managed to avoid a snap election which could have brought in an anti-EU, nationalist Lega-led government. But risks of snap elections in 2020 are limited unless Lega leads polls.
• Spain: The Socialist party PSOE again won the repeat elections on 10 November 2019, with 28.0% of the votes, but fell even shorter of a majority and failed to increase its seats in Congress. The consequences on the economy are likely to be minimal, as political developments have broadly failed to be a hindrance for the economy in the past four years. However, with the economy now slowing, and compliance with fiscal rules for Spain becoming more difficult, the lack of a formal government in Madrid may start to matter in 2020.

Middle East:

• Saudi Arabia’s oil processing facilities were attacked in September 2019. The escalation coincided with President Trump’s decision to pull the US out of the 2015 Joint Comprehensive Plan of Action (JCPOA nuclear agreement between Iran, the European Union and the five permanent members of the United Nations Security Council) and re-imposed economic sanctions have affected the Iranian economy.