Politics and investing - the outlook for 2021
Politically motivated – how politics and investments work together
Politics is always a major influence on stock markets and investment performance. Markets tend to react instantly to election results and policy changes – sometimes even to mere predictions or rumours of results and changes.
That's why we at Canaccord Genuity Wealth Management keep a close eye on the political world, monitoring developments to ensure we're ahead of the game and can predict and mitigate their effects on our discretionary clients' investments.
You might assume that after surviving the storms of the US election and Brexit, we could all look forward to a quieter, more settled period. Sadly, almost certainly not. New uncertainties will come out of the woodwork and the focus of political tension will move to other areas.
Unity at last
The aggressive US election campaign and post-result tensions are typical of the highly charged partisan environment in the US, but also in the UK and many European countries. The polarisation in US politics has been described as the greatest since the Civil War; not a cheerful comparison.
The so-called populist wing of the electorate has been at constant loggerheads with the 'liberal' tradition in both the UK and the US, and we may assume the tense politics will continue. It is possible, however, that people will put some of their differences behind them and focus on shared tasks ahead. For the UK, it would clearly be the post-Brexit world and how to make the most of any economic opportunities. For the US, there is a larger hazard looming: the exponential growth of China. Can the US contain it?
How to deal with the Dragon
Most forecasts say that by 2035 China will have overtaken the US as the biggest economy (see graphic below), and the US is likely to unite around picking up that gauntlet. The differences between Trump and Biden in China policy are probably going to be of style rather than substance, as the whole US population is squarely behind a tough stance against China. Whether the US is capable of stopping China's ascent is a moot point at this stage; what matters is that it will try and do so. We are witnessing a challenge to the technological, military, commercial and financial supremacy of an existing superpower that rarely happens – but it's happening now.
Technology will be the US's weapon of choice, but military confrontation cannot be ruled out, given China’s incursions into other countries’ territorial waters in its attempt to control the South China Seas. Trade is another area of conflict, but one where the US has a weak hand, not only due to its unquenchable trade deficit with China amid rather unshifting supply chains, but also its lack of allies in the endeavour. Traditional Western allies, like Europe, Canada and Australia, have felt disenfranchised by President Trump’s dismissive attitude and will take some time to rejoin the US banner.
This is also happening against the backdrop of post-COVID-19 Asian economies outpacing the US and Europe and gathering under the Regional Comprehensive Economic Partnership (RCEP), a comprehensive trade accord for one third of the world’s population and GDP. For America to enlist allies against China will require total unity within the US and open arms to traditional democratic allies rather than strongmen or dictators. Also, will President-Elect Biden join the Trans-Pacific Partnership (TPP) which Trump ditched when he arrived in the White House?
In the UK, Brexit throws up considerable hurdles. The economic cost of the EU divorce can only be made up if the UK's trade deal with the EU is successful in its implementation and complemented with further comprehensive agreements with the US, China, India, Australia, New Zealand, etc. These pacts will easily take a decade to complete and require a greater 'bandwidth' of trade specialists than is currently available in the UK. This precise word was recently used by Canadian PM Trudeau, who bemoaned the slow and ineffective negotiations with the UK on a trade agreement.
Here again, national unity and a clear understanding of the final goal, regardless of one’s original political bias, will be essential. It is not clear whether the present government is fully aware of the challenges raised by this pathway.
Inequality bites back
The post-COVID world will also have to deal with the massive inequalities created during the lockdowns. High-income people have recovered their pre-pandemic economic level and household wealth has hit yet another record. Yet low-income families have only just managed to survive thanks to massive government transfers in many countries, in particular in the US.
More than 20 million Americans[i] have been receiving unemployment subsidy. The Pandemic Emergency Unemployment Compensation (PEUC) is a 13-week programme for those who have exhausted state jobless benefits. The Pandemic Unemployment Assistance (PUA) provides benefits to self-employed and gig workers. The Paycheck Protection Program (PPP), part furlough, part dole, has been sending direct cheques to millions of Americans.
As a result of all these generous transfers, many poorer people have managed to withstand the lockdowns and indeed even make some savings. This situation is subject to the additional fiscal stimulus just approved in the US but which will need further extensions when the new US Congress is installed in January. Importantly, as many as 30-40 million[ii] Americans are at risk of eviction if they cannot resume paying their rent.
A similar predicament could emerge in the UK and other European countries. While we would love to believe that a vaccine will bring us all back to normal, a more realistic expectation is that many sectors of the economy will suffer for at least one more year and need further government support. This will have to be paid for at some point, as budget gaps cannot balloon endlessly. Higher taxes may well loom on the horizon. The UK Chancellor was recently advised about the opportunity to raise Capital Gains Tax rates. This is likely to be the beginning of similar exercises in many parts of the world.
As mentioned earlier, this matters politically because the income gap is closely correlated to the electoral divide and can lead to politics veering towards the extremes. Any reconciliation within a country could only be achieved by reducing that income gap.
Will governments get COVID-19 right eventually?
Even governments that have failed to convince their population that they are doing a good job managing the pandemic might eventually get support and discipline from their constituents. They simply need to offer the right solution to diverse swathes of society, and modulate solutions and shutdowns to suit their audience. It has been suggested that COVID-19 is less dangerous to young people than driving a car. Most governments' COVID responses were originally very blunt (full lockdown) and have progressively become sharper and more tailored. Even better focus will be required to convince whole countries and make sure younger generations buy into the solution rather than feeling targeted as the problem.
The next two political topics, climate threat and automation, may seem less relevant right now but will doubtless dominate our economic cycle ahead.
Global warming is not just a slogan for marches and rainbow coalitions. It is an existential threat and the biggest headache our economies will face in the next 10-20 years. If President-Elect Biden does rejoin the Paris Agreement as promised, the US will join the EU, China, Japan and South Korea in aiming for the 2050 Net Zero emissions target, an ambitious goal which will require equally bold government policies.
One can feel somewhat sceptical about the objective, given that no politician today will be in power in 2050 to face the music, but the younger generation will not let them forget it and businesses are committed to see it through with new technology. The cost to some nations will be larger than for others, with China and India bearing the biggest burden due to their current high pollution levels.
Will automation destroy our jobs?
The last political minefield, which will dog generations to come, will be automation. In the past we have seen rural shifts to urban industry; we have also seen people moving from manufacturing employment to services. In each case the welcoming sectors were bigger and richer than those left behind, and the transition was very long and progressive (except perhaps in China where hundreds of millions swarmed to the cities from the countryside in less than a generation).
How many new positions can we create and in which sectors, if many repetitive, routine jobs end up being automated? Will these new activities be make-work or really fulfilling careers? Can this switching process be left to the market or will it require a government strategy and industrial programmes? We have to assume that the next elections in democracies will be coloured by these considerations, particularly if we are still reeling from the massive job cull of the COVID-19 lockdowns.
What may be an excellent undertaking for companies could be disastrous for employment if the process is not handled properly. Many countries are heavily exposed to job destruction. Northern European nations might be somewhat sheltered from its effects, but Central European countries, the Middle East and even Japan could be on the frontline for huge employment losses if they don't succeed in finding replacement sectors to provide alternative jobs.
Coincidentally, some of these regions may be 'orphaned' politically following President Trump’s departure, as they have been clinging to his coattails during the last four years and could be vulnerable to further populist stirrings.
What will these political challenges mean for investors?
The US-China battle for hegemony will be played out in real time, with companies and governments as the unwilling actors. We will likely be asked to choose between US and Chinese industrial specifications. As investors, could you simply spread your money across the two regions or will you also be prevented from mixing and matching? You can no longer rely on buying US or European shares to have access to the growth of the Chinese market but have to be more direct and creative, with the caveat that the governance in many Chinese firms is not of the standards we are used to. These are ideas we will be introducing into our discretionary portfolios over time.
Brexit will weigh on the UK economy but, as we have said before, it offers investors great opportunities to select companies that can deal with the issues. Stockpicking will be paramount. UK value shares, which have been massively derated in 2020, may deserve their place in the sun soon. Consider choosing investment managers who can navigate the attractively priced companies with catalysts to their performance, whilst avoiding the ‘value traps’ (businesses that are going downhill).
Taxes may well go up in many jurisdictions as governments need to balance the books – and you may want to speak to your wealth adviser about your personal situation.
Global warming is not only a threat but a great opportunity for the businesses that have the technology to deal with it. Our ESG investment policy (environmental, social and governance) should point us in the direction of these businesses. Interestingly, some ESG investment decisions are not black-and-white but involve trade-offs: for instance, would you support a technology that reduces emissions but in so doing eliminates many jobs? Investment managers face these questions every day. President-Elect Biden’s appointment of veteran John Kerry as a climate envoy highlights how important the environment will be in his administration. Our ESG investments are poised to capture that.
Finally, after five years of political tension in Western democracies, we may be able to look forward to a period where we can concentrate on selecting investments without second-guessing the implications of politicians’ bombastic words. However, other political risks will doubtless emerge.
Read our other 2021 investment themes:
- How COVID-19 is impacting the world of investment
- Just too big? Will the technology titans hit a wall of regulation in 2021?
- Interest rates: the hunt for investment income.
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
The information contained herein is based on materials and sources that we believe to be reliable; however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.
[i] Bureau of Labor Statistics, US
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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.