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Politics and investing - why investors should start to pay attention to politicians and what they say

If investment firms had been asked a few years ago: ‘Should we pay attention to politicians?’ the chances are they would have answered ‘No’. As we all know, politicians are good at campaigning and promising but once they face the cold reality of power, they deliver only what they can.

However, we can no longer say this with impunity. Recently, voters have delivered crushing verdicts on traditional expectations and this could be the beginning of a trend for investors to watch more closely.

For investors, what has changed when it comes to politics?

Globally, over the last three decades, the share of wealth taken by the top 1% has soared, while the bottom 90% in the US and Europe has seen shrinking living standards.

This should have triggered the historical switch to left-wing redistributive policies, except for one twist: in the eyes of this bottom – or squeezed - 90%, people in the lowest income groups outside of the US and Europe have done better than them. Emerging markets have come out of the cold with hundreds of millions of people taken out of poverty into the middle class, often thanks to an aggressive ‘Asian tiger’ export drive. Simultaneously, migration has risen across the world, particularly into the EU and the US. Some are refugees from conflicts, oppressive regimes or gang wars. Others are just seeking a better life for themselves in a richer land.

This has led to a surge in right-wing politicians advocating immigration controls, protectionism and confrontation with other countries.

What do we know about populism?

First, there is a massive chasm between populist parties and the political establishment. The so-called ‘rules-based’ post-WWII consensus aimed for centrist policies to bring together a majority of the population. This is what populists want to destroy, mostly by promoting policies that are unacceptable to that consensus. In most countries, coalitions between populists and the centrist establishment are shunned, leading to gridlock (Sweden) or a coalition of extremes (Italy).

Second, the agenda is being driven by populists, by making sure that their proposals take front and centre stage over everything else: building a wall, reducing the trade deficit or fighting with Brussels.

Interestingly, conventional political objectives such as job creation, job security, standards of living, safety, healthcare, education, etc, are not part of the populist agenda, which focuses instead on a symbolic conflict with the establishment.

This begs the question of whether the electorate will give populists the benefit of the doubt for long. What happens after the whole agenda has been carried out if there is no improvement to individuals’ wellbeing? What if income is lagging behind prices, unemployment is rising and businesses are closing down? Will the squeezed 90% still favour the populist politicians gloating that they have done everything they promised?

Right-wing populism vs. socialism - how can investors expect politics to evolve?

In countries where two main political parties dominate the scene, they are increasingly absorbing extreme elements.

Left-of-centre parties are veering further left towards an idea that many people had long forgotten: socialism. The concept is no longer taboo in the US, where most young people prefer it to capitalism. Likewise, young voters in the UK have increasingly identified with Jeremy Corbyn’s more extreme-left policies.

It seems that these left-wing politicians are ready to pick up the pieces if (or when) right-wing populists fail. The difficulty for investors in navigating politics is twofold: gauging which parts of a populist or socialist agenda are likely to be implemented and how damaging they could be to the economy and markets.

President Trump is a case in point: his campaign showcased ideas that scared markets (trade wars, border walls), but after his election he was seen as a tax-cutting, regulation-slashing, pro-business conservative, which investors loved. Last year, his agenda switched back to these worrisome proposals, jolting risk markets. Investors are not always clear whether a right-wing populist will deliver pro-business reforms or have damaging and futile confrontations that pander to voters’ visceral prejudices.

When it comes to socialism, however, the markets’ verdict is clear. They don’t like it. Punitive taxes, nationalisations and overregulation do not appeal to investors. Before selling all your investments and moving to a Pacific Island, though, you may want to consider that, if populists are now finding it difficult to implement their programme, any future socialist government could find itself in the same predicament. Even if they’ve been elected on a platform to “tax the rich until the pips squeak” they might not have the majority they need to enact it. The market’s initial swoon on the election result could be followed by a relief rally.

The political struggle could swing from one extreme to another until all options are exhausted before returning to centrist policies. A quick look at US presidents since 1980 shows that Democrats went from centrist (Carter, Clinton) to more left-wing (Obama, or the current crop of 2020 hopefuls) and Republicans followed the same route rightward (from George Bush senior to junior and now Trump). The next Democratic president could be well to the left of Obama.

How can investors navigate the landscape of politics?

Given how deep seated the economic problems are today (inequality and lack of skills), it is hard to see how any political movement will solve them to the satisfaction of its voters and then move towards the centre ground in politics. There could well be volatility to accompany sharp shifts from one extreme to another, but the existing populist parties could also become more mainstream and apply traditional market-friendly conservative policies.

Either way, investors should become more tactical in their asset allocation, and also emphasise investments that could prosper under varying scenarios (Asian companies, which are less vulnerable to the populist craze; or secular changes such as artificial intelligence, cyber-security, longer life expectancy, etc).

More importantly, they should learn not to dismiss politicians’ rants as mere bluster and ask themselves what would happen if these proposals were to become law. Keeping one’s eyes open and being ahead of the game is the best way to preserve and grow one’s wealth, rather than simply assuming that voters will see sense in the end.

 

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 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.

 

 

Photo of Michel Perera

Michel Perera

Chief Investment Officer

Michel is responsible for the investment process at Canaccord Genuity Wealth Management, with a specific focus on asset allocation and stock selection. He also works to maximise the potential of Canaccord Genuity's proprietary and industry-leading stock screening tool, Quest®.

Michel is an experienced investment strategist having spent the past 19 years at JP Morgan Private Bank where he was the Chief Investment Strategist (EMEA) responsible for running investment strategy and overseeing tactical asset allocation decisions for discretionary portfolios within the region.


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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.

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