Anti-establishment sentiment is growing, with political leaders seen as “alternative” drawing support across the Western world – from the rise of Bernie Sanders and Donald Trump in the US, to France’s National Front, Germany’s AfD, Italy’s Lega Nord and Syriza in Greece.
The surprise triumph of the Brexit movement falls into this camp too. And a number of commentators have suggested inequality is the root cause of the trend.
“Brexit is thus far the biggest electoral riposte yet to our age of inequality,” writes Michael Hartnett of Bank of America Merrill Lynch in a note. It’s because the economic recovery of the last eight years since the financial crisis has been unbalanced, he adds.
Western economies are supposed to be on the mend, but not everyone feels that way.
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“The man on the street perceives a very different reality. They know that their living standards have fallen, their cost of living has risen, and that their job prospects have deteriorated. They see a loss in confidence and economic stagnation when they are being assured the opposite,” says Peter Schiff of stockbroker Euro Pacific Capital. There are “underlying frustrations” which are fuelling the growth of anti-establishment parties, says Jason Hollands of investment firm Tilney Bestinvest.
“It’s happening because the little guy has seen very little growth in his meagre savings… People don’t understand what has happened but they know it isn’t right.”
These frustrations are creeping into policy, whether or not champions of alternative politics become mainstream. “These leaders don’t have to get elected. They pull the debate in a certain direction,” Hollands adds.
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CENTRAL BANK POLICY
There are number of issues which have fuelled anti-establishment movements, most of which are a result of globalisation. They’re angry at outsourcing of jobs overseas, technology replacing workers and perceive that immigration is negative.
But some experts point the finger at the monetary policy underway since the financial crisis – including QE and record low interest rates – as the real driver of financial inequality.
“The vote in the UK illustrates the fundamental inefficacy of the monetary and financial policies that have been implemented by the world’s dominant central banks,” says Schiff.
QE meant the printing of trillions of fresh cash by central banks in the US, UK, Europe and Japan. The idea was for the central bank to use those extra trillions to buy up debt from regular banks. High street banks can then make funds available for people and businesses to borrow, and they also invest the cash – all of which should boost the economy.
But those steps haven’t quite panned out – the action hasn’t followed the theory.
“QE has supported people who own assets, by creating asset price inflation. The top 1 per cent have become increasingly wealthy because they own shares, bonds and property, but ordinary people have struggled to make any headway,” says Hollands. “QE has become discredited. It is very, very tenuous that it benefits the real economy.”
So stock markets have soared to record highs and property bubbles have appeared, while at the same time the government has implemented austerity measures. It’s a disconnect which has fuelled anti-establishment movements, says Schiff.
Indeed, there’s a growing consensus that QE does little more than raise asset prices. While it’s still underway in Europe and Japan, they’re trying new variations of it, and central banks around the world are looking to increasingly unusual and untested methods to fire up their economies.
Low wages are also having an effect. In the US, wages are at a record low in relation to the country’s GDP.
“Since the S&P 500 started up... the ratio has never been so high,” says James Hanbury of Odey Asset Management.
This also accounts for corporate profits being so high. “There’s no question that corporate profits relative to returns to labour are at a multi-year high,” says Tom Slater, manager of the Baillie Gifford American fund.
Hanbury says it’s a worrying sign as it forebodes social unrest – and may explain the surge of support for populist candidates including Sanders and Trump.
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“You need to be wary... You end up with social unrest and you can see it in the political movements at the moment that are trying to change society,” he added.
Hanbury says the situation is untenable and he is holding off from investing in US companies. With wages so low, consumers have less to spend which may lead to a collapse in corporate profits, and social pressure should lead to companies paying higher wages.
CORPORATE TAX AVOIDANCE
Controversial tax arrangements of global businesses have never been far from the headlines. Despite the legality of the arrangements, the seemingly small amounts of tax paid by some businesses has drawn the wrath of ordinary people and has likely contributed to anti-corporatist feeling.
Although larger tax bills would mean corporate profitability takes a knock in the short term, not all investors are solely focused on the upcoming quarterly results. Baillie Gifford’s Slater says paying an equitable rate of tax would be paid back in spades in the long term, from better relations between brands and consumers.
“I think it would be good for these companies to put more tax back into the jurisdictions in which they operate. These companies are increasingly reliant on the goodwill of consumers and I think not paying taxes damages the brand,” says Slater. “I would rather they had lower profits in the short-term.”