I wrote that many voters, when they don’t get a hearing, will understandably back populists despite knowing that their solutions are as likely to hurt as to help them. Investors need to come to grips with these dynamics because “a little extra democracy can throw a lot of extra sand into the wheels of global capitalism.”
Since then, we have heard a lot about our new “populist” era. But does that label capture the full scope of what’s going on in the world? If we maintain such a narrow focus, we may misunderstand how the nature of political risk in our investment exposures has changed.
Liberal democracy works when capable people stand for election on deliverable platforms, and then run things on the advice of an experienced, neutral civil service and other experts. Everyone gets a say, but this “technocratic” elite pulls the levers.
When enough people sense that this elite has stopped listening to them, or when this elite gets something spectacularly wrong, the mobilization of the resulting anger with easy slogans and simplistic fixes can have a meaningful political impact. That is generally what we mean by “populism.”
The political flashpoints on today’s front pages don’t all fit with this model, however.
Brexit and the Trump administration’s trade policies are arguably populist phenomena, as were France’s gilets jaunes protests.
The violence in Chile may have been sparked by a hike in Santiago’s metro fares, but it feeds on a more general discontent with inequality, the cost of living and frustration at a technocratic governing class that has long been respected by outsiders. The recent election result across the border in Argentina fits the populist pattern, too.
But across Chile’s other border, in Bolivia, we see something different. Here, a part of the population rose up against apparent election fraud by an increasingly authoritarian populist leader. A lack of liberal-democratic institutions is the perceived problem here, not the constraints imposed by them. In Hong Kong, protests have arguably been led by a local elite, and not against inequality but against perceived threats to freedoms from a highly technocratic authority. In Spain, a surge of support for the right-wing populist Vox party owes more to local separatist tensions than to the usual anti-inequality, anti-globalization and anti-immigration forces of populism.
In a word, it’s complex.
Complexity does not mean there isn’t a common thread. It just isn’t “populism.”
It is, rather, the presence of social media and the wide, rapid spread of information—and, frankly, disinformation—that it facilitates. From the 2011 “Arab Spring” to the Iran fuel-price protests, social media has enabled a specific price hike, a piece of legislation or a moment of video footage to mobilize masses, seemingly anywhere, in a matter of hours or days.
For those of us in financial markets, this new dynamic implies two things.
First, the impact of political risk is now much more likely to be sudden and unforeseen.
Second, as Joe Amato referenced in last week’s Perspectives, that risk now exists in places where it has been negligible for decades—the likes of the U.S., the U.K., Hong Kong and Chile. These economies are often driven by consumption, which makes for rapid transmission of popular discontent into GDP and financial markets.
To use risk-management jargon, this combination of sudden, sharp shocks in historically placid markets results in return distributions with fatter tails.
If you’ve been investing in Argentine government bonds for 30 years, a 30-point sell-off is well within the normal distribution of returns. To find anything like the third-quarter collapse in Hong Kong’s GDP growth, however, we have to go back to the crisis years of 2008 or 1997. The recent 20% decline in the Chilean peso also stands out, recalling what happened over a much longer period during the copper-price slump of 2013-15, or during the financial crisis.
It will take time for risk models to recalibrate to this new era of higher political tail risk. Social media has made the world more polarized, and more mobilized, than at any time in recent memory. Portfolios may be more exposed to that than we realize.
In Case You Missed It
- NAHB Housing Market Index: -1.0 to 70.0 in November
- U.S. Housing Starts: +3.8% to SAAR of 1.31 million units in October
- U.S. Building Permits: +5.0% to SAAR of 1.46 million units in October
- U.S. Existing Home Sales: +1.9% to SAAR of 5.46 million units in October
- Japan Purchasing Managers’ Index: +0.2 to 48.6 in November
- Euro Zone Purchasing Managers’ Index: +0.7 to 46.6 in November
- U.S. Purchasing Managers’ Index: +0.9 to 52.2 in November
What to Watch For
- Tuesday, November 26:
- S&P Case-Shiller Home Price Index
- U.S. Consumer Confidence
- U.S. New Home Sales
- Wednesday, November 27:
- U.S. Durable Goods Orders
- U.S. 3Q 2019 GDP (Second Estimate)
- U.S. Personal Income and Outlays
- Friday, November 29:
- Euro Zone Consumer Price Index
Statistics on the Current State of the Market – as of November 22, 2019
|S&P 500 Index||-0.3%||2.6%||26.3%|
|Russell 1000 Index||-0.2%||2.7%||26.4%|
|Russell 1000 Growth Index||-0.2%||2.8%||30.4%|
|Russell 1000 Value Index||-0.2%||2.5%||22.5%|
|Russell 2000 Index||-0.5%||1.8%||19.3%|
|MSCI World Index||-0.4%||2.0%||23.6%|
|MSCI EAFE Index||-0.6%||0.6%||18.2%|
|MSCI Emerging Markets Index||0.0%||0.7%||11.4%|
|STOXX Europe 600||-0.6%||0.8%||18.8%|
|FTSE 100 Index||0.4%||1.4%||13.7%|
|CSI 300 Index||-0.7%||-0.9%||30.8%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.0%||-0.1%||3.1%|
|Citigroup 10-Year Treasury Index||0.6%||-0.7%||10.0%|
|Bloomberg Barclays Municipal Bond Index||0.4%||0.1%||7.0%|
|Bloomberg Barclays US Aggregate Bond Index||0.3%||-0.2%||8.6%|
|Bloomberg Barclays Global Aggregate Index||0.1%||-0.8%||6.2%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.0%||0.5%||8.5%|
|ICE BofAML U.S. High Yield Index||-0.3%||-0.2%||11.6%|
|ICE BofAML Global High Yield Index||-0.2%||-0.2%||10.8%|
|JP Morgan EMBI Global Diversified Index||-0.2%||-0.6%||12.6%|
|JP Morgan GBI-EM Global Diversified Index||-0.3%||-1.2%||9.7%|
|U.S. Dollar per British Pounds||-0.6%||-0.8%||0.7%|
|U.S. Dollar per Euro||-0.2%||-1.1%||-3.5%|
|U.S. Dollar per Japanese Yen||0.1%||-0.5%||1.0%|
|Real & Alternative Assets|
|Alerian MLP Index||-0.5%||-4.1%||-0.1%|
|FTSE EPRA/NAREIT North America Index||-1.3%||-3.2%||23.5%|
|FTSE EPRA/NAREIT Global Index||-0.4%||-2.2%||20.1%|
|Bloomberg Commodity Index||-0.4%||-0.5%||4.6%|
|Gold (NYM $/ozt) Continuous Future||-0.3%||-3.4%||14.2%|
|Crude Oil (NYM $/bbl) Continuous Future||0.1%||6.6%||27.2%|
Source: FactSet, Neuberger Berman.