Blog Why Bearish Politics is Catching Up with Bullish Markets

Why Bearish Politics is Catching Up with Bullish Markets
Investors could be forgiven for becoming blasé about political risk in recent years. For a long time, regardless of what chaos disrupted politics, from Donald Trump’s election to Brexit, to the threat of nuclear war on the Korean peninsula and unclear election results across Europe, markets continued to rise serenely. Until recently.

The contrast between the economic and political outlooks was notable in different sessions of the 21st Credit Suisse Asian Investment Conference (AIC). On Day 2, Andrew Garthwaite, Head of Global Equity Strategy for Credit Suisse, outlined a convincing series of counterpoints to arguments that the bull market had run its course. (The simple fact that it has been long-lasting is not one of them: “Recoveries tend not to die of old age,” he noted.)

Compare that with the address given at the end of Day 1 by Sir John Major, former UK Prime Minister, who remarked that he needed 50 days, rather than 50 minutes, to discuss the extent of the “shifting sands of geopolitics”. After tackling a sobering list of political challenges, Major gamely attempted to land on a positive note by mentioning that “growth is back, it’s widespread and it may consolidate and increase”.

Populism and nationalism isn’t a Trump thing, it’s a worldwide thing… People are sick and tired and they want real people that serve with a pure heart that make a difference telling it like it is. The President got it and captured it. Reince Priebus, White House Chief of Staff (2017); Chairman, Republican National Committee (2011–2017)

It Actually is the Economy

Market gyrations during AIC week and more recently serve as a reminder that you can’t separate politics from economics and finance; at least not for long. The selloff of tech stocks, for instance, has highlighted growing concerns among citizens and governments about how once-disruptive, now-dominant tech platforms like Facebook are becoming intimately linked with political campaigns. (Lest anyone forget, the cloud hanging over the Trump White House also relates to alarm about how Russia reportedly sought to influence the outcome of the presidential election through a campaign of disinformation on social media.)

"Attacks on the fabric of the nation can go far beyond attacks on physical infrastructure,” Major warned. “Information itself is now being weaponized.” The fallout for Facebook served as a timely reminder that markets aren’t immune to this.

The connection between technological disruption and political upsets goes deeper: the worrying rise of nationalist politics and the appeal of mould-breaking politicians like Trump reflects in part the societal impact of technology and globalized supply chains on employment. As former Reserve Bank of India Governor Raghuram Rajan mentioned in his address on Day 2 of the AIC (explored in our piece on technology disruption) societies will adjust, but it will take time.

It’s not surprising in this context that disrupted populations find solace in inward facing moves like Brexit (“an act of self-harm”, in Major’s view) or Donald Trump’s America First trade policy (the latest manifestation of which, in the form of tariffs on steel, aluminium and a host of Chinese imports, rattled markets at the end of AIC week as fears of a global trade war took hold.)

Reince Priebus, Trump’s former White House Chief of Staff, speaking on Day 3 of the AIC, put it this way: "Populism and nationalism isn’t a Trump thing, it’s a worldwide thing… People are sick and tired and they want real people that serve with a pure heart that make a difference telling it like it is. The President got it and captured it. "

Enter China

A worrying upshot of this shift, Major warned, was that the world now lacks champions of democratic values. "Democracy may have been seen as the ideal to protect personal liberties, but it is no longer seen as the inevitable route to sound governance and economic success." Major noted that across Eastern Europe, anti-liberal nationalist politics have taken off where only a decade ago post-communist democracies seemed firmly entrenched.

Nor is this just a Western phenomenon: the AIC panel on politics in Southeast Asia on Day 3 noted the rising appeal of “strongman” leaders and identity politics in the region—even in countries with democratic traditions like Thailand, the Philippines and Malaysia.

Part of the reason for this transition, Major said, is that where once the US was seen as “the undisputed leader of liberal and democratic nations around the world”, Trump’s agenda and unilateral decisions, such as to withdraw from the Paris Climate accords, risk leaving it bereft of allies and the world short of democratic leadership. "This American slide from undeniable precedence is becoming the biggest geopolitical change we have seen in decades,” Major said. “Its effect on the world order is as damaging as it is worrying."

Where the US used to be supporting many Asian economies, it’s now the turn of China. Lito Camacho, Credit Suisse Asia Pacific Vice Chairman and former Secretary of Finance of the Philippines

Into this leadership vacuum, China, with its highly successful model of state capitalism, is stepping with increasing celerity. To date, its involvement in world affairs has not matched its economic power, Major noted, but this would soon change—not least through initiatives like the One Belt, One Road programme, “a momentous statement of China’s geopolitical ambition and a seductive exercise in soft power”. It has also directly copied US soft power strategy, for instance by setting up a “Voice of China” international radio station.

The use of this soft power could work more effectively than conventional hard power—as China is finding in Southeast Asia. Just a couple of years ago its aggressive push into the South China Sea drew robust reactions. But although the region is still divided in how to respond, the recognition of China’s economic importance—combined with the US’s declining influence—has led to a change of tack (notably on the part of the Philippines) that has reduced tensions. Lito Camacho, Credit Suisse Asia Pacific Vice Chairman and former Secretary of Finance of the Philippines, put it this way at the AIC: “Where the US used to be supporting many Asian economies, it’s now the turn of China.”

Keep Calm and Stay Informed

There’s no reason for investors to worry unduly about all of this, of course. As Major pointed out, the world has met and bested a series of serious political challenges before and can do so again. But the interconnection of technological, political and economic disruption is something investors can ignore only at their peril.