Bull or Bear? Politics and Capital Markets
Capital markets do not operate in a vacuum; turbulence on the global political scene has a significant impact on their performance. Robert Parker, Chairman of the Asset Management and Investors Council at Credit Suisse, identifies current major political trends investors should watch out for.
There is currently an apparent investor consensus that there are two key political trends impacting markets. First, a reversal from globalization back to regionalism or nationalism, and second, the electorate's dissatisfaction with traditional political parties and ideologies. Inevitably, however, this consensus masks more complex trends. It is possible to identify some key political and social themes that are having an actual or a potential impact on markets and investment performance.
The first and perhaps most prominent theme is the creation of new political parties. New parties typically fail when they cannot expand beyond one political issue, are subject to infighting or fail to appeal to the broader electorate. Where new parties succeed, structural reforms are introduced with significant implications for asset class performance. A historic example of where an existing party significantly shifted its ideology is the reformist policies pursued by the Conservative UK government under Thatcher, which eventually boosted UK growth and equity market performance. Over the next two to three years, investors will be carefully monitoring the success or failure of the Macron government in its ability to enact structural reforms in France with obvious implications for French equity markets.
The world appears to be shifting away from globalization and conventional US hegemony toward a multipolar world economic order.
Populism Growing on the Left and the Right
There are a number of very clear populism-driven trends. Dissatisfaction with wealth inequality and poor wage growth will likely drive public opinion and result in the creation of more new parties or a shift to a more populist stance by existing parties.
Populist initiatives can include an expansion of fiscal policies, a relaxation of budget deficit targets and increased spending, control of migration, defensive trade policies, tax breaks for low income earners, increased taxes on wealth/higher-income earners, higher welfare and health spending, a trend increase in infrastructure spending, increased expenditure on low-cost real estate, higher state borrowing, increased corporate taxation and low corporate taxation, but greater tax compliance.
It is difficult to generalize on the impact of populism on markets except where it triggers major changes in fiscal policies and notably in taxation (for example, the current Tax Reform Bill in the USA) and in public spending (potentially in the UK, Germany and currently in China).
Multipolar World Order
The world appears to be shifting away from globalization and conventional US hegemony toward a multipolar world economic order. Key to note here is the economic and political expansion of China in Asia, the renewed cohesiveness of the EU and the increased cooperation of the Latin American countries.
This change is encouraging new geopolitical relationships, e.g. Saudi Arabia and Russia, Turkey and Russia, the expansion of Chinese influence and a discordant relationship between the EU and the USA.
The investment implication is that regional markets will be more influenced by regional or local factors rather than global trends and that correlations between regions will break down – emphasizing the opportunity for more active investment management rather than global passive asset allocation.
Regionalism and Authoritarianism
The desire to become an independent state and a movement towards authoritarianism are two trends visible in numerous locations. Independence movements are developing in a number of countries, notably in Europe, however the fear of regional independence is likely to have only temporary negative effects on markets.
The shift towards authoritarianism has become evident in Turkey, Russia, China (as demonstrated at the 2017 National Congress) and certain African countries. While it may potentially have a profound impact on the economic outlook for specific countries, the impact on investor behavior so far seems minor.
Widespread geopolitical tension calls for more active investment management. Major sources of tension are North Korea versus the USA, potentially (again) the South China Sea, Saudi Arabia versus Qatar/Turkey, the USA versus Turkey, the de-certification of the Iranian nuclear agreement, potential disagreements over the breakup of Syria after the ISIS defeat and the use of sanctions against Venezuela. However, the historic evidence is clear that adverse geopolitical events tend to have a short-term impact on capital markets and can represent "buying opportunities" for investors. Negative geopolitical shocks inevitably lead to investors switching to perceived "safer" asset classes.