Populism is the buzz word of the day. As such, it’s tempting to ignore it.
But investors need to wrap their heads around it. They’ve spent the last couple of decades being told that politics doesn’t matter. And in the era of convergence and globalisation and omnipotent central banks, it didn’t – for a while.
Then that era ended, as all eras do.
Now politics matters a lot. And the companies that did best from the convergence trade are now the ones that stand to lose out most heavily…
Why understanding populism matters to investors today
Hedge fund giant Bridgewater has just put out a big research note on populism. The piece isn’t especially insightful – it’s a whistle-stop tour of a number of populist regimes from the relatively recent past – but it’s a handy primer, particularly if your political history is rusty.
Populism comes about because the “common man”, as Bridgewater puts it, feels left behind economically; threatened socially and culturally by outsiders; and feels that the government isn’t on his side. As a result, you get “strong leaders” elected, on the basis that they’ll make life better for said common man. It’s a simplistic model with a lot of assumptions baked in, but I think it fairly represents most people’s view of populism.
All of this matters now because the populist share of the vote is at its highest level since the late 1930s, according to a rough and ready index put together by Bridgewater. That sounds worse than perhaps it is – and given some of the questionable historical comparisons being bandied about by some of the more dramatically inclined, I should highlight that the writers also point out that “the ideology of the populists today is much less extreme compared to the 1930s”.
But in any case, Bridgewater reckons that “populism’s role in shaping economic conditions will probably be more powerful than monetary and fiscal policies (as well as a big influence on fiscal policies)”.
What does that mean? That’s where it gets trickier. Today’s populist leaders (such as Donald Trump) haven’t been in power for long enough to find out, while in many countries (France, for example), they may never come to power. Bridgewater’s aim as investors is to understand past populists now, so that there’s a “road map” to hand that might give us some idea about what to watch out for.
But populist, pro-common-man policies include: “protectionism, nationalism, increased infrastructure building, increased military spending, greater budget deficits, and, quite often, capital controls”.
That all sounds pretty familiar, doesn’t it?
It’s also worth noting that populism doesn’t necessarily have to be “nasty”. It often is. But Bridgewater labels 1930s US president Franklin D Roosevelt as a “quasi-populist”, for example, with policies designed to redistribute wealth and rhetoric attacking the elites (he spoke of a “new industrial dictatorship”, for example).
In fact, one of the most telling quotes from FDR, cited by Bridgewater – and the one I think investors should be keeping in mind – is the following, from 1936 (it’s a long quote, but it’s worth reading).
“For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people’s property, other people’s money, other people’s labour, other people’s lives…
“Against economic tyranny such as this, the American citizen could appeal only to the organised power of the government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people’s mandate to end it.”
So why is this relevant?
Populist policies are bad news for multinational profits
The reason I’m flagging up this quote is because I don’t believe that we’re going to descend into a 1930s-style all-out disaster that ends in another world war. I like to hope that we’ve learned a thing or two since then – and on a more pessimistic note, I also don’t think that there’s a lot of point in investing as though that’s going to happen.
But I do think that this narrative – the idea that a sufficient number of angry voters feel that they’ve been shafted, and now want the government to do something about it on their behalf – is very important for your investment strategy.
It matters because a leader does not have to be classically populist in order to adopt populist policies. Trump is obviously a populist. He plays to the crowd, he knowingly panders to prejudices, and he’s very good at blaming groups of “others” for bad stuff happening.
Someone like Teresa May is different. Her populism is more about “fairness”. For example, I wouldn’t be surprised to see the government cracking down on definitions of “self-employment”, and battering companies that are built on the “gig” economy later this year. The government taking the place of organised labour, in order to secure the workers a fairer deal – plenty of echoes of FDR’s speech in there.
It’s also interesting to consider what it might mean now that inflation is rising in the UK. If real wages start to fall again, and the government wants to reform the tax credits system (say), then how could you create policies that do that? Push up the national minimum wage? Make it ever harder to employ foreign-born staff so that you squeeze the size of the workforce?
I don’t know (and I don’t think either of those are a good idea), but one way or another, the share of profits going to labour rather than capital seems very likely to rise under a shift to a populist regime (whether “nice” or “nasty”). And even if the government in question is not the “obvious” populist candidate, you’ll likely find that their policies shift in that direction regardless.
That in turn is bad news for corporate profits and particularly for companies whose business models have been part-built on arbitraging wage differentials across the globe.
It’s another reason why I’d be particularly wary of the “bond proxy”-type stocks right now. Big multinationals producing goods that everyone needs, and which are owned primarily because of their predictable revenues and predictable dividend streams. A lot of them look very expensive relative to their history right at the time when the environment that has sustained them is changing fast.
I’m not suggesting you panic. I’m just suggesting that you take some time to work out how much of your portfolio is invested in big developed world blue chips, and then take a long hard look at them and see if you think the investment case still stands.