Last week, during the UN General Assembly in New York, a panel of economists and foreign affairs experts gathered for a discussion on the impact of the US election on multilateralism. The consensus among participants was that Donald Trump would be detrimental to global cooperation, while Kamala Harris remained an unknown variable. However, what stood out most was that attendees were more concerned with where the world would go with or without US engagement rather than how America would engage with the world.
In recent years, it seems as though America has transformed into one giant emerging market – full of both promise and peril but above all else, unpredictability. Foreign political leaders are aware that policies can drastically change every four years. CEOs understand that today’s subsidies and tax breaks may vanish tomorrow. Investors are contemplating the premium they should assign to rising debt and increasingly volatile politics.
Governments and businesses alike are quietly attempting to reduce their reliance on the US. This includes increased military spending by Japan and Europe as well as German corporations like SAP, Lidl, Bayern Munich football club, and Port of Hamburg shifting away from American technology platforms due to concerns about sensitive information passing through US or Chinese servers.
While European money continues to flow into the US partly due to worries about China, there is also growing apprehension about America as a risk node. A government affairs representative at a major US technology company revealed receiving numerous concerns from European clients who believed “America was becoming less reliable” as a partner.
Uncertain politics and policy implications such as tariffs, export controls, and sanctions contribute to this sentiment. However, at its core lies a lack of clear guidelines and demand signals that businesses can rely on for long-term planning. Will Donald Trump dismantle the 2022 Inflation Reduction Act if re-elected? Will Kamala Harris adopt similar approaches towards Big Tech as Biden?
Mark Rosenberg from research firm GeoQuant argues that this “EM-ification” extends beyond presidential politics; weak institutions unable to define or enforce political rules have led to social polarization, political violence,and economic uncertainty surrounding key events like elections or debt ceiling debates.
The normalization of violence in American society is another concerning aspect; mass shootings occur approximately every two days in addition to other forms of violence becoming commonplace experiences for children growing up in America today.
GeoQuant data since 2016 consistently shows this EM-ification trend within US politics – while overall political risk remains lower than most emerging markets (EMs), rates of change in risk related factors such as political violence,social polarization,and institutional risks have increased similarly comparedto historically volatile EMs like Russia,Turkey,Bolivia,South Africa ,Lebanon,and Hungary.This trend persisted throughout both Trump’sand Biden’s administrations.
This phenomenon isn’t exclusive to America alone; average developed country risks are increasing faster than those in emerging markets due tounstable leadership transitions,policy swings,and resulting economic/financial volatility.It appears we are all now partofemerging markets.
Investors have been questioning when these developments will erodethe dollar’s safe-haven statusor weakenUS equity markets.Despite some recent decline,the dollar remains strongandUS stockmarkets continue torise against all odds.However,politicalrisk does affect10-and30-year bond yields accordingto GeoQuant data.It has keptthe VIX(highly anticipated stock market volatility measure) elevatedand pushed daily Treasury yields higher.These factors also explain why gold pricesare currentlyat record highs.Investorsare hedging their bets by recognizing therisk associatedwith investingintheUS,ratherthan solely focusingon potential rewards.
