Wars, looming pandemics, and, in particular, the erratic nature of a potential “Trump 2.0” administration are complicating the work of policymakers, central banks, analysts, and investors alike. Against this backdrop, the DVFA surveyed its members on the impact of geoeconomic developments on the research and investment process.
“We are living in an era in which political events increasingly trigger real-economy and financial market shocks. Measurable and modelable risks are evolving into fundamental uncertainty, as Frank Knight already distinguished between risk and uncertainty in 1921,” commented Ingo Mainert, Deputy Chairman of the DVFA.
“Political Markets Have Short Legs”: A Principle Under Scrutiny
A long-standing empirical observation suggests that “political markets have short legs,” meaning that political events tend to have only short-term effects on financial markets rather than lasting ones. However, this assumption is increasingly being questioned in light of a of geopolitical and geoeconomic shocks, often described as a state of “permacrisis.”
While a majority of respondents (55%) still consider this principle broadly valid, 34% now question its general applicability, and 11% view it as entirely obsolete. Respondents noted that, depending on the nature of the shock, geopolitical developments and their spillover effects can indeed exert long-term influence on financial markets.
Financial Analysis Still Dominates the Investment Process
As political developments increasingly shape macroeconomic conditions and capital markets, the question arises to what extent professional research and investment processes have adapted.
Nearly half of respondents (48%) continue to focus primarily on traditional financial analysis. This reflects the view that political frameworks are inherently embedded in economic processes and thus indirectly incorporated into investment decisions.
However, 34% now explicitly assign greater weight to political analysis. Meanwhile, 18% remain undecided as to whether recent political developments have materially altered research and investment frameworks.
Preference for In-House Political Analysis
Similar to traditional country risk analysis, the assessment of political risk and uncertainty in an increasingly complex environment requires significant resources and long-standing expertise. This involves the continuous collection, processing, and qualitative evaluation of large volumes of non-quantifiable information. Accordingly, financial analysts and investors are frequently faced with a “make-or-buy” decision.
Almost half of respondents (49%) rely primarily on in-house political analysis, incorporating external research only indirectly. By contrast, 37% adopt a hybrid approach combining internal capabilities with selectively sourced external expertise. Only 5% rely exclusively on third-party research.
Donald Trump Identified as the Key Uncertainty Factor
Political uncertainty arises from multiple sources. The survey focused on three key drivers of political risk, producing a largely expected outcome: “Trump 2.0” accounts for 59% of responses, followed by Russia (21%) and China (20%).
“Recent geoeconomic developments of this magnitude necessitate a broader and more holistic research and analytical framework,” Mainert concludes. “Given the declining shelf life of assumptions and forecasts, a more cautious approach is warranted. The use of external expertise in decision-making is therefore becoming increasingly important, particularly in the context of political risk analysis.”
Source: DVFA monthly question
