A paradox stalks modern markets. Many professional investors tell us that they do not like the results of most recent elections, though they would – I am sure – also tell us they think democracy is the best system of government. Their dislike of President Trump has not stopped them bidding US shares up to new highs.
Investors are rightly wary of authoritarian regimes and single-party states, and usually apply a discount to the shares in these markets. Such arrangements, after all, make good company governance more difficult and fail to expose government decisions to sufficient criticism to try to improve the quality of those choices. In some cases, dictators corrupt private-sector companies operating in their territories, or subject them to policy changes that do not respect property rights.
Populism is popular
In the last few years, many market people have also expressed their dislike of President Trump, of Brexit, of the two winning parties in the Italian General election, of Syriza when it won the first time in Greece and of Geert Wilders Party for Freedom, which was the top performing of the many Dutch parties. This also applies to the governments of Poland and Hungary, and of some of the populist parties in Spain. They lump them altogether, call them populist, and argue against their words and deeds.
It is the job of market analysts and investment managers to work out the likely impact of different governments on economies and share prices. It is not usually in the professional investors’ job specification to express political preferences. Outside the investment office, people can say what they like and campaign as they wish.
So why are so many investment professionals negative on populism? If you really want to understand markets and work out what buyers and sellers of shares are likely to do, understanding why people have voted as they have is a necessary first step. After all, the populist parties are often the new majority, and when they form a government they help shape the narrative that influences markets. Populists are often in favour of reflation, arguing for more spending and for tax cuts. Done in the right way these can provide a boost to flagging economies and to share prices.
It's about control
It seems that the biggest reason many professionals dislike populism is its common wish to restrict inward migration. In Eastern Europe, in Italy and in the US populists have been elected on a ticket of cutting numbers coming into their countries. Doubtless there are some voters who support them who are motivated by racial and religious views the rest of us find intolerant or unacceptable, but most voters are saying something less shocking. They think the pace of inward migration has been too high, and they want governments to accept a lower number of new entrants each year so public services can keep pace and communities can adjust more easily. Whilst Europeans were busy condemning President Trump for wanting to extend President Clinton's Mexico wall, they were quiet about Austria building a border fence itself and about the EU helping pay for a long Turkish border defence.
The larger unifying cry of the populists is to expand the economies more quickly, and create more and better-paid jobs faster. This is particularly true of the populist movements in the Eurozone, where high unemployment and slow growth have been served up for the last decade. President Trump successfully campaigned on boosting the US growth rate with tax cuts, investment and pro-business policies. The two winning parties in the Italian election want fiscal expansion and wish to test out the tight controls of the Euro scheme, just as Syriza did unsuccessfully when first elected. Some populists want to tax and regulate enterprise more, others want to tax less, which makes a difference to market reactions.
This underlines the extent of the paradox about investors. Whilst many have spent months decrying President Trump, they have backed his expansion policies with money and driven share prices a lot higher as a result. Whilst they have been opposed to Brexit, they bid the UK market up strongly for the first year after the initial share price mark down on the vote.
I will judge investment professionals’ true attitude to populism by what happens in the markets. It is often better to judge them by their deeds, not their words. That is what I will also do with the populist governments themselves. Some might do good things, others will do badly. They need to be analysed on what they do, more than on what others say about them.
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