Should investors listen to politicians?
Written by Adon Beddoes on June 10, 2019.
Traditionally the answer to this question has been no. Politicians have always been good at talking the talk at election time yet failing to deliver much of what they promised when they actually get into power and for this reason investors have generally been advised not to pay too much heed to their proclamations. However, the current political landscape has made me wonder whether investors should continue to ignore the discourse of current political leaders.
Political expectations have been turned on their head in the last few years. Just a decade ago, most people would have scoffed at the thought of Donald Trump becoming president yet in 2016 he was elected. The Brexit referendum also came out of the blue and delivered a result which was surprising to many. So should investors start to watch politics more closely when considering the asset allocation of their portfolios?
The new political landscape
In the US and Europe the rich are getting richer and the poor are getting poorer. The wealth of the top 1% has soared in recent years while the bottom 90% of the population have seen living standards fall in the face of rising prices and static wages. Back in the day, this would have triggered a rise in support for left-wing redistributive policies but that hasn’t generally been the case in the 21st century. In fact, more and more people in the west are turning towards the far right.
By comparison, in emerging markets, particularly the ‘Asian tiger’ nations, the bottom 90% of the population have fared much better. The number of households in poverty has fallen with millions making the leap from working to middle class. This is in large part to a growth in exports.
Concurrent with the widening chasm between rich and poor in the west, we have seen a rising trend of migration with many refugees seeking to escape conflicts or dictatorial regimes which make living conditions in their homeland untenable. Other migrants are simply searching for a life which offers better opportunities. The additional pressure this has placed on services, resources and the job market in the countries where refugees and migrants choose to settle has contributed to the rise of previously marginalised right wing parties, and individuals, who champion protectionism and strict controls on immigration.
The rise of populism
Since the Second World War centrism has been the dominant political outlook with centrist parties trying to unite the majority of the population. In contrast, the new populist guard are looking to sow disharmony with extremist policies which divide the population. In some cases, such as Italy, this has resulted in extreme parties forming coalitions. Elsewhere politics appears to be in deadlock –the Brexit-dominated UK being a prime example. The populists are neglecting the issues which conventionally take centre stage in politics – healthcare, education, safety, standards of living and employment – and instead shining a light on the failings of the establishment and this has resonated with electorates. Trump’s popularity in the US has been largely born out of widespread disaffection with the political class. But will the populists be able to stay the course if the electorate sees no improvement to their wellbeing? Can populist governments survive if incomes continue to fail to keep pace with prices, if unemployment rises and if businesses fail?
The evolution of politics
Some experts predict that in countries where there are two dominant political parties, these parties are being forced towards extremes. Some have remarked that socialism, which has fallen out of fashion in recent years, may be about to make a reappearance on the world stage with young people in the US and the UK, for example, increasingly attracted to socialist rather than capitalist ideas. If the right-wing populists fail, will the left wing dominate in their wake? And what does that mean for investors?
Let’s look at the US as an example. Before Trump was elected, markets reacted badly to his manifesto with its talk of border walls and trade wars yet once he was in power the policies he introduced, including slashing regulations, cutting taxes and supporting business, were a hit with investors. However, the last year has seen volatility in US markets as the President’s campaign promises have come back to the fore. While some believe that Trump will continue to bolster business with future reforms, others fear that by bowing to the prejudices of his voters he will only succeed in stirring up harmful confrontations which could ultimately trigger a swing to the left.
One thing we do know about socialism, which favours policies such as higher taxes, increased regulation and nationalisations, is that the markets do not like it. A socialist revival would not be good news for investors but there’s no need to panic just yet. After all, just like the populists are finding right now, socialists will also struggle to gain a consensus to make real and lasting changes and will need to make compromises.
What should investors do?
The biggest economic problems we face in the 21st century are inequality and a paucity of skills and these issues don’t look like being solved any time soon by any party whether from the right or left. It looks likely that politics will remain volatile in the foreseeable future with possible wild swings from one extreme to the other and little common central ground.
How does that affect your asset allocation? Well, it certainly poses a challenge but as ever, the key to investment success lies in diversity and investing for the long term rather than trying to time the markets based on geo-political events. By combining a portfolio of proven active managers you can rest easy that they are maximising the opportunities and minimising the risks presented by the changing political global backdrop.