Why investors should start to pay attention to politicians and what they say
Investment firms use disclaimers in documents. Our disclaimer comes right here: we are investors and, as a firm, do not espouse any political opinion. Instead, we judge political events by the impact they have on markets.
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. Politics is the art of the possible.
The things that really affect investors and markets are businesses, economies and policies. Occasionally, stark political changes have affected the economic picture, e.g. the Thatcher-Reagan era of tax-cutting and deregulation, but overall, investors have been better off looking at fundamentals rather than politics.
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. Politicians are now promising unpredictable and nonconformist changes and actually starting to deliver on them. Markets are often baffled by these policies, but only because they don’t listen to politicians and are thus surprised when they carry out their promises.
Why is this happening?
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 the ‘squeezed 90%’, looking at countries outside the US and Europe, people in the lowest income groups have tended to do better. 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.
Another way to look at this is through the share of labour and capital in the economy. In the US, the labour share of corporate GDP has fallen from 65% in 2001 to 55% in 2015, barely recovering since. Capital’s share of the economy has grown faster than the share of employees.
Voters have responded by electing populist right-wing politicians offering simple, even simplistic, solutions: restrict immigration, cut imports, fight central governments.
How is this likely to evolve?
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, fighting with Brussels; with the naysayers’ protests often branded as ‘fake news’. President Trump has 50 million Twitter followers compared to CNN’s two million viewers.
Interestingly, these proposals seem to be stepping-stones to an ultimate objective, rather than the objective itself. 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 assumes that populist voters are satisfied if this fight is carried out, even without any improvement to their own wellbeing.
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? What if income is lagging behind prices, unemployment is rising and businesses are closing down? Will voters still favour the populist politicians gloating that they have done everything they promised?
Consider the alternatives
Investors should look at what alternative politicians are offering. In the US and the UK there is a battle between populist views and a more traditional force: the left. 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 is illuminating to watch the debate within the US Democratic Party: the youngest and newest congresswoman from New York started a trend by proposing 70% marginal tax rates, unleashing a torrent of one-upmanship on income and wealth taxes.
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 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. The new Brazilian leader, Jair Bolsonaro, fits that mould: markets are still uncertain which way he will go.
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. While 70% marginal tax rates being bandied about among Democratic Party candidates may concern markets, we mustn’t forget history. George Harrison sang “There’s one for you, 19 for me” in the Beatles song Taxman, bemoaning 95% tax rates in the 1960s, which were often blamed for the ’brain drain’ from the UK. Even in the capitalistic US, marginal tax rates of 80% plus were prevalent in the 1950s and 1960s and the economy suffered.
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.
What hope for centrist parties?
What about the so-called ‘liberal elite’, currently maligned by populists? Are they likely to get back in to power? If history is any guide, the answer is no.
The political struggle could swing from one extreme to another until all options are exhausted before returning to the discredited liberal elite. The Merkel-Macron front is likely to be eclipsed by louder voices from right-wing populists, until they in turn are replaced by left-wingers. 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.
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.
As ever, you can expect us to keep a very close eye on political developments and the currency markets – and carefully manage your portfolios accordingly. With our depth of analysis and actively managed approach, whichever political scenarios play out we will be there to guide and support you, and seek out the most promising investment opportunities on your behalf.
If you have any questions or want to find out more about our investment views, please contact us: +44 20 7523 4500.
This article was created for the DISCUS website by Sean Taylor, Director at Canaccord Genuity Wealth Management (CGWM). If you would like to find out more about Canaccord Genuity Wealth Management, you can visit their dedicated page on this website or see how their services compare to other discretionary offerings via the DISCUS Compare tool >