The one exception is of course in the UK where an ill-judged snap election has left Theresa May in command of a minority government beholden to the Democratic Unionist Party of Northern Ireland. This is not the ideal backdrop for the most important political negotiations since World War II but the government achieved some success in convincing the EU27 that sufficient progress had been made in the Brexit negotiations to move on to the more complex phase of discussions covering trade, transitional arrangements and the future relationship. It is clear the EU sees the Phase One deal agreed as a binding agreement, whilst UK politicians see it as more of a framework.
The EU Commission has already warned that if the UK tried to unpick what has been agreed, it would halt the next phase of talks. Given the time taken over the first phase, wrapping these talks up by October 2018 will not be easy, even if the discussions begin quickly. We face many months of noise, headlines and brinkmanship before we get any sort of deal.
In the US, there were huge expectations for policy change under the Trump administration, but in reality, the only major legislation was the tax cut, signed into law just before Christmas. Trump has promised further stimulus in 2018 via infrastructure spending, though the benefits of such spending usually take time to feed through. Trump has work to do to ensure his adopted Republican party maintains control of Congress; given his poor approval ratings, a successful outcome for the Republicans at the mid-term elections would be unprecedented. The tail risk in US politics is the ongoing investigation into the Trump campaign’s links to Russia. It is unclear how far this will go; what is clear is that if the Democrats take control of Congress in November, the chances of impeachment increase significantly. If nothing else, a Democrat win will mean Trump will struggle even more to push legislation through Congress, meaning he many only have a ten month window to implement his policy agenda.
The electoral calendar outside of the USA is relatively limited in 2018 with elections scheduled in Russia (we think we know the winner already), as well as Brazil where a backlash against the corruption across both main parties looks likely. In Europe, the Italian elections, scheduled for early March, will dominate the agenda. Whilst populist parties failed to deliver election wins in France and the Netherlands in 2017, a negative outcome (from a market perspective) is still possible from Italy. This may well cast a cloud over European equities until the spring, much like we saw in 2017.
Investors did well if they generally ignored the geopolitical tensions during 2017, whether they be risks from North Korea, the Middle East or from more domestic political issues, such as the Catalan independence vote. An escalation in tensions or even a military response to North Korea continues to represent the biggest known risks to market sentiment from a geopolitical perspective but with little insight as to the intentions of either Kim Jong Un or Donald Trump it seems imprudent to speculate on what happens next. What we do know is against a backdrop of benign monetary policy and strong economic data, investors were prepared to look positively on any political dramas last year. Assuming the backdrop remains the same, this may well be the case in 2018 as well but investors should beware of being complacent given politics still has the ability to move markets sharply from time to time.