“The memory of the 1930s is still there,” says Keith Wade, chief economist at Schroders. “People find trade protectionism very appealing because globalisation can indeed be so disruptive.”
While global GDP growth has arguably been muted in recent years because world trade has stagnated, it has still held up reasonably well. Equity markets, such as those in the US and the UK, remain at record highs. If the globalisation backlash we are witnessing now is indeed as much of a game-changer as Wade, Williams and many others believe, why are investors yet to feel the impact?
President-elect Donald Trump has been the most vocal Western leader when it comes to announcing protectionist measures, vowing to impose a unilateral tariff of 45% on goods imported from China. He may initially boost growth through growing private and public debt levels despite taking protectionist measures. But, as M&G’s head of fixed income Jim Leaviss noted on his Bond Vigilantes blog: “An increase in borrowing today by consumers and governments is merely stealing growth from the future.” Part of the reason is of course that it takes time for protectionist measures from the likes of Trump to kick in and be felt. While the process of globalisation arguably has stalled, there have been no concrete attempts to roll it back as of yet. And many experts doubt that can ever really happen, as it’s difficult to entangle the dense web of global supply chains without disrupting economies. However, the case that deglobalisation is bad for the economy is not necessarily going to be as persuasive as one may think, especially if that case is made by experts, who are widely thought to represent the interests of the elite.
Political football
Regardless of the policies pursued by Donald Trump or a prospective nationalist leader in a European country, political risk will undoubtedly increase, as by definition is the case when the status quo is being challenged. Since the start of the second world war, it hasn’t been more difficult to predict the future than it is now.
“This increased political risk means there will be a greater risk premium in many sectors,” says Wade, who believes we just have to get used to politics driving asset markets.
“The healthcare sector in the US has for example become a sort of political football,” he adds. US healthcare stocks nosedived in the run-up to the presidential election as Hillary Clinton, who had said she wanted drug producers to cut prices, looked likely to win. After Trump’s victory, the sector made a strong recovery as the Republican candidate had vowed to abolish Obamacare. When Trump then backtracked from this promise and suggested he could introduce drug price caps, stock prices slid back again (see ‘US healthcare sector’ graph above).
Uncertainty means it will also be more difficult to predict future returns. Such an environment is negative for assets with long duration, be it bonds or equities, says Williams. “Therefore it seems appropriate to prioritise those companies with capital projects on short payback periods over those with higher internal rates of return that stretch off further into the future,” he adds.
A combination of populist fiscal policy and protectionism will also fuel inflation, another red flag for long-duration assets. “This could lead to a derating of company valuations and to a trade away from bond proxies to cyclicals,” says Wade.
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