Cazenove's Jeffrey: The dangers when assessing political risks

Greater-than-normal uncertainty

We have seen some notable political events over the past year. What has marked these out from the more run-of-the-mill happenings is they have introduced greater-than-normal uncertainty.

There is a rather trite comment often made by economists and strategists that markets hate uncertainty. In fact, uncertainty is vital to the effective operation of financial (and other) markets.  It is only with different opinions about the future, at whatever level this may become manifest, that we can have effective two-way prices. With certainty, we take away the different probabilities that individuals might ascribe to different outcomes and, therefore, any pricing of risk. In the statistical world, risk refers to volatility. While a particular outcome might be generally expected,...