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The response to our Special Video Blog Series on “The End of the Age of Globalisation” was “off the scale” last week. We thank you for watching and, in particular, for taking the time to provide your feedback. Clearly this is a subject that struck a chord with many of you and in order to answer the questions we received we have compiled some of our thoughts on how politics and markets interlink and what the implications of a currently chaotic political order are for investors.
A very well respected equity fund manager once said to me that he spent about 10 minutes of his day thinking about politics and macroeconomics and that was 10 minutes “wasted”. Personally, I think that view is wrong.
Yes, certainly the price one pays for an investment and the holding period matter immensely, but politics affect the economy; the economy affects a company’s sales; sales in turn drive a company’s profits; profits ultimately drive a company’s share price. In my view, an investor has to think about both the political issues and the economic implications when judging how much to invest in certain regions, asset classes, sectors or companies.
It should therefore be considered worrying that political risks for financial markets appear to me to be as high now as they have been through my career and looking back through history all the way to the end of the Cold War.
Let’s hope that my reference to the Cold War is not fitting at this present time, as an increasing number of people are referring to the deterioration of the relationship between the US and China, which started over trade but has now morphed almost “out of control” into national security issues and technology, as the start of a new “Cold War”. We think there is some truth to this new “Cold War” theory and certainly view the increasingly fractious relationship between the G2 economies, namely the US and China, as being the greatest risk to the world over the next few decades. History teaches us that the handover of economic and political power from one hegemon to the next is rarely frictionless and we have been watching the worsening of relations between these two countries with some concern. In the short term, we expect a deal of sorts to be announced over the trade situation, but longer term we should all recognise that “Pandora’s Box” has been opened and how the US and China get along going forward will be vital for the global economy and, by implications, financial markets.
While the US and China relationship is the key issue that will occupy our attention through at least the next decade, many other political risks currently exist and come from the sclerotic and unpredictable Trump administration, the never-ending saga over the UK’s departure from the European Union, the obvious divergence in views amongst European leaders and the rise of the strongmen leaders in Russia, Italy, China, Brazil, Turkey and the Philippines, to name but a few. Each of these risks creates uncertainty over policy making and therefore less predictability for investors. Given that we do not expect any of these risks to subside in the near term, we do not think taking an “risk on” stance is justified and arguably investments in the “hot spots” should trade at a discount to long run history.
Another key factor for investors to ponder is that we appear to have come to an end of the “golden age of globalisation”, as we discussed in last week’s video blog. The period that ran from the start of the 1990s to the Great Financial Crisis was a period of intense “globalising” of national political, economic and financial interests, but that ship ran aground in the financial crisis and appears to be sinking before our eyes. “Nationalism” is now all the rage which makes me think that the “age of globalisation” has become an “age of localisation”. Politicians are now being forced to put their countries own interests first or fear intensifying the rage of the populations who feel left behind by the recovery of the last few years, which was mostly to the benefit of the rich, and vulnerable about the future. The rise of “extreme” parties across Europe and the revolt that we are seeing against perceived globalists, such as the increasingly incompetent and ineffective Macron in France, are signposts for where the world is going and it is impossible at this time to say that momentum of this movement is slowing. Indeed, if we think it is bad now, wait until the next big economic downturn and the moment when the central bankers and politicians want to bail out the rich at the expense of the poor once again. That really could be a “pitch fork” moment.
There is also no doubt in my mind that markets became more political in the Great Financial Crisis and the “recovery” years that have followed. Clearly this makes sense when one understands that the modus operandi of the various central bankers around the world has been to inflate asset prices to benefit those consumers lucky enough to have exposure to financial or property assets. This has led politicians to take an ever closer interest in the path of financial markets, with the most obvious example being the obsession that Donald Trump has had in the US equity market; or at least while it was going up every single day. Asset prices have become particularly important in the US, where the stock market capitalisation has grown to over 150% of national GDP, and where revenues from share sales have been one of the only bright spots of US national tax revenues. It is no wonder that US politicians have taken an ever keener interest in the health of the US stock market as increasingly the US stock market is becoming the US economy!
What does the breaking down of the age of globalisation and an increasingly volatile political environment mean for investors? It seems to us to be a world where there is less stability. Where there is less stability there will be less confidence. In a world where there is less confidence there will be a reduced willingness within companies to invest in their businesses in overseas countries. This will lead to a world of lower growth rates and increasing volatility in those rates of growth. Our view is that taking excessive risk within investment strategies at this time, while valuations are not overly cheap and political risks are elevated, would be wrong.
However, that doesn’t mean one shouldn’t invest, but rather that an investor should be more selective. In an increasingly fractured global economy and political environment, where nationalism trumps globalisation, will also bring opportunities as well as risks. Regional governments will seek to boost domestic companies to ensure national security interests are served well. Sectors such as the auto sector (as we have seen in the US) should be beneficiaries of such domestically-focussed policies, whilst the tech sector could well come under further pressure. As we have seen in recent months over the Chinese companies ZTE and, more recently, Huawei, overseas tech champions will come in for major scrutiny and the ability to do business in other countries’ markets could well be impaired. At the same time, domestic tech companies fortunes will be boosted by governments who are more likely to trust their own champions.
Political safety should be cherished by investors and, in particular, Japan should be considered a relative safe haven when it comes to the chaotic political situations in other regions and countries. Abe-san’s premiership continues in the Land of the Rising Sun and the domination of the LDP and the near certainty of its continued governing of Japan offer certainty in an uncertain world. Japanese equities are very cheap by comparison to other markets and they are unloved by investors.
Global investors should also focus on those markets where a grim political environment is already factored in. The UK could be a key example of political woes affecting valuations at this time and some UK domestic companies are already factoring in a truly miserable ongoing situation. We have moved to neutral in UK equities having been underweight for the last five years as we increasingly feel that the political pain is factored into valuations.
Chief Investment Officer
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