Many people seem angrier than ever about their politicians, the state of their societies and how the economy is not working for them. This is hardly new.
Political developments in the Roman Empire were dominated by the struggles between the elites and those over whom they presided.
Throughout time, most major political and economic change has been driven by the frustrations of large parts of the population who felt the current system was not working to their benefit.
Indeed, the largely laissez-faire status quo of today was triggered by populist dissatisfaction with the prevailing statism of the 1970s.
Recently this anger has manifested itself in the ‘Brexit’ EU referendum in the UK, the election of Donald Trump in the US and, in Europe, the emergence of the AfD in Germany, the National Front in France, Podemos in Spain, the Five Star Movement in Italy, Syriza in Greece, and far right parties in Holland and Finland and across Scandinavia. Fringe parties in Europe have been polling at record high levels.
through all of this we are reminded that at any given time, certain secular themes are more powerful than any political forces.Globalisation, technological change and the rise of China have brought many advantages to our societies yet have also, in the eyes of many, led to stagnant living standards and the loss of secure, well paid jobs.
Combined in many cases with an influx of foreign labour, these developments have left many people feeling that their communities are unrecognisable.
The global financial crisis seemed to show how it is always ordinary people who suffer from the mistakes of others who are never held accountable for their actions. This is exacerbated by revelations that the ‘super rich’ and corporations can legally mitigate their tax liabilities while the rest of us cannot.
A rise in inequality
This has all manifested itself in a rise in inequality to levels that now threaten to break the very social bonds between individuals that are necessary for our political, economic and societal systems – in place since the end of the Second World War – to function.
The root causes of the rise of these forces are as varied as the countries in which they exist. And their chances of success and the implications of their rise are deeply unpredictable.
So what does this all mean for investors? How can we try to predict and react to the possibility of momentous change?
Capital owners have been undoubted beneficiaries of the post-war economic system and, in particular, the more recent growth of globalisation and technological change. For investors, it is a system that has generated around 7 per cent a year returns on equities.
And the benefits have been increasingly skewed in favour of capital owners: profits as a share of GDP are at an all-time high while wages as a percentage of GDP are at an all-time low.
Surely any challenge to this situation will be negative for capital owners? In a stable political world where traditional left-wing forces would rebalance the system in favour of labour over capital, one might agree.
However, one of the consequences of angry politics is a weakening of the traditional left-right political axis, removing the framework through which we assess political economy. Are populists in favour of higher or lower taxes? Do they support more regulation or less?
Furthermore, because populist challenges to our institutions are new, will they even succeed or will they ultimately be thwarted by incumbent beneficiaries of the current model?
The five rules of investing in times of populism
1. Amid all this uncertainty we believe it is important to bear in mind what we have dubbed 'The five rules of investing in times of populism': populism equals uncertainty.
And markets hate uncertainty. The fracturing of any political and economic consensus that has largely been in place for 30 years will lead inevitably to uncertainty for both the suppliers and users of capital and labour.
Government policy, which influences the demand and supply of these factors of production, will be volatile. Even if the status quo ultimately triumphs, the uncertainty as this plays out will be negative for risk assets. In contrast, it will probably be good for ‘safe haven’ assets such as US Treasuries.
2. Be prepared for a smaller world. One of the few common themes between nearly all populist movements is the rejection of unfettered globalisation, whether that manifests itself through free trade or the free movement of people.
This consensus seems to be leading policy makers to tackle this issue head on, as characterised by talk of ‘Hard Brexit’ and the rejection of pending free trade deals by both recent candidates for the White House.
While there is evidence that, if properly executed, a more closed world can be positive for domestic economies, execution risk is extremely high and in the short-term most risk assets will probably suffer from any restriction in the supply of labour or access to foreign markets. Poor economic conditions will probably be supportive for government bonds.
3. Populists like to be popular. The economic recovery since the global financial crisis has been one of the weakest on record. This is not necessarily surprising given the scale of the crisis and the deleveraging that was necessary.
However, there are signs that politicians of all political persuasions are seeing a renewed role for fiscal policy to support economic growth through stimulus spending or lower taxes. This should be positive for equities as company profits typically grow when the economy is doing well and consumers are spending more money on their goods and services.
It is also likely to be negative for government bonds if this spending is financed by more government debt. In addition, it could also lead to higher inflation, which is bad for asset classes that offer a fixed coupon and return of principal, unlike equities.
4. Volatility creates opportunity. So fractured is much of our public discourse today that over-riding themes may be few and far between. But such splintering creates some very specific investment themes.
The US healthcare industry, the private education sector or infrastructure spending are all examples of where a careful assessment of country-by-country and sector-by-sector risks and opportunities will reveal interesting investment opportunities.
5. The world goes on. For most of the past three quarters of a century we have lived under the constant threat of nuclear war. Almost 20 years ago we witnessed the start of an entirely new ‘war on terror’.
And less than a decade ago many of us feared for the very future of our financial system. Yet through all of this we are reminded that at any given time, certain secular themes are more powerful than any political forces.
And there will always be certain goods and services that consumers and businesses need, from toothpaste to electricity. Such relatively stable investments tend to be more expensive in rather unstable times, but investors shouldn’t discount the possibility that they will continue to generate solid returns.
Highly engaged, grounded and fleet of foot
It often feels as though we are living in tumultuous times with more people than ever questioning some of the key tenets of our economic systems.
The many consequences of what we are living through appear contradictory; the possible range of outcomes looks vast; and being certain of anything sounds foolhardy.
This makes for an extremely challenging investment environment. However, even – especially – in today’s unusual times we believe these Five Rules are a good guide.
The times we live in will create plenty of opportunities for those who can find them. Investors should stay highly engaged, grounded and fleet of foot.
Andrew Summers is head of funds research, Investec Wealth & Investment
