Political risk factor becomes key to market volatility

That means investors can no longer rely on purely economic and market modeling, sending them rushing to both build their own knowledge and gain expert advice.

Economists covering Britain now scrutinize opinion polls, study key marginal constituencies and devise algorithms forecasting election outcomes alongside analyzing interest rate prospects and economic growth.

Meanwhile, specialist risk consultancies more used to rougher frontier markets turn their eyes to Western economies.

“We've definitely seen an uptick in interest, particularly over southern Europe and Britain,” said Preston Keat, head of research for consultancy Eurasia Group. “It really began late last year but since January it has really taken off.”

Queries range from multinational firms wondering if they should have contingency plans for Eurozone breakup to specialist banks and brokerages who felt they lacked the in-house political expertise, he said.

Developed world markets must also keep an eye on emerging economies. Local politics in several Central and Eastern European economies — particularly Hungary, Latvia and Ukraine, all with elections this year — could imperil IMF deals and spark crises that could swiftly spill over borders.

Perhaps fortunately in terms of policy continuity, none of the troubled fringe Eurozone states have elections this year.

In contrast, the U.S. mid-terms look set to drive more populist policy from the White House, impacting not just banking reform but also increasingly strained relations with China over everything from currency pegs to cybersecurity.

Rows over Google and weapons sales to Taiwan have yet to significantly spill over into global markets, but a more serious spat would be a different matter. In the background, tensions with Iran simmer and could again hit world markets.

Washington-linked political risk should fall after the mid-terms to rise again in time for the 2012 presidential poll, experts say, while in Britain whether risk falls after the election will depend on the size of the government majority.

Attention on the Eurozone could take longer to dissipate.

“I would say this could be with us for a year to 18 months,” said Eurasia's Keat.

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