Is Populism A Problem?

Do we need to worry about Populism?

We live in a world characterised by increasing tension around immigration, wealth disparity, unemployment and corruption. These tensions have taken functional form in the increasing power of 'populist' political parties.

A populist politician or political party is one that seeks to highlight the difference between the "have's" and the "have not's", and to use this as a way to gain mass-market support amongst voters who can relate – typically a substantial part of any population.

We see this with the rise of the 'EFF' in South Africa, the success of the "leave" campaign in the vote for the UK to leave the European Union, 'Podemos' in Spain and even Donald Trump's bid to be president in the USA. Each of these entities have begun to wield real power by playing on the fears of ordinary citizens, be they the loss of jobs from technological progress or the perceived threat of immigrants. Populism is closely linked to radical change and upheaval in society and markets. In this quarterly commentary, we seek to elaborate on the real effect of populist politics on investment markets and how we should factor it into our approach to investing.

What are the risks that populism bring to investing?

Populism and the policies that underpin it expose markets to a new set of risks that one would not ordinarily consider. Firstly, it is key to note that populism is net-negative for markets. Populism is disruptive, it involves the changing of the status quo in society and repositioning wealth away from the current holders of that wealth to those currently without. Populism brings with it increased risk to valuations as uncertainty rises, whether it be uncertainty over government policy decisions, regulation, nationalisation or even trade deals. 

Populism is negative for global trade, as it is often centred on policies aimed at the protection of local industries, the closing of borders and the protection of the local population relative to outsiders. This view is in stark contrast to the push for increased globalisation and trade which has characterised the world for the last 25 years. Although populism is net negative, there can be some positives taken out of this push against globalisation: stronger local industries with less global trade means that regional diversification of investments is easier to achieve and there is more support for the home economy - a good outcome when searching for diversification in client portfolios.

The increased move towards populism also speaks to a loss in faith by some in a capitalist market system. This is resoundingly negative for financial assets. One outcome that is consistently seen when a populist party is elected, or a populist policy is put into place, is that the country in which this happens is re-rated downwards by the global investment community. 

Why does populism find support?

• Wealth Gap

The first reason is that there exists a persistent and increasing wealth gap around the world. At the beginning of 2016 an Oxfam publication claimed that the top 1% of the world's population held an equal amount of wealth to the other 99% combined. The poorer majority is questioning the fact that they seem to be the only ones hurting from austerity measures after the recent great recession while the 1% appear to only be gaining wealth.

• Job Security

Secondly there are increasing fears relating to potential loss of jobs in blue collar industries in developed Western nations due to the globalisation of world trade. The natural progression of these jobs has been towards developing nations in the East, where populations are willing to do the same jobs for less money. When jobs are threatened and the ability to feed a family comes under pressure, then populations tend to react passionately. This has been the popular narrative used recently by both Donald Trump in America and the 'leave' campaign in England.

• Immigrants

The third major reason that populism has gained so much traction in recent times is that there is a perceived threat from immigrants. War in the Middle East has left entire countries devastated and the developed world has been called to take in refugees from the crisis. This line of thinking leads to anger and resentment towards immigrants as they perceivably threaten both the safety and jobs of the locals. 

Underlying these three reasons there is a constant narrative of loss of faith in the political parties who have let the current status quo develop. People want an alternative and populism presents that alternative world view to many people.

How should we respond to the risks of populism?

Populism is not the only risk in global markets, and likely not the most severe either.  There are simply too many potential risks to consider and individual risks like this can’t and shouldn’t be singled out.  What we can do is evaluate the basic building blocks of a portfolio to ensure that it is not overly skewed towards the more obvious risks.  For the rest, diversification is the only real solution.               

September 30 2016 By Fundhouse Politics