Posted inUnited States

Beware of the rise of the populists

This week the Austrian Chancellor Werner Faymann, a left-leaning Social Democrat, resigned in response to the recent rise of the nationalists in the country, including the recent victory of the Freedom Party in the first round of the presidential elections.

Europe’s two biggest economies France and Germany are seeing big gains for their nationalist parties, Front National and Alternative fur Deutschland.  

While we are a long way from these parties or individuals gaining power, at first glance there are a number of clear reasons for investors be concerned over the prospects for equities and other asset prices should Trump win in the US and nationalists take control of some European countries.

Free trade barriers

Chief among these is the prospect of a reining in of free trade and resurgence of tariffs. This in fact has been a central part of the Trump campaign. He has frequently pointed to cheap imports as a chief cause of low wages and unemployment, and vowed to put an end to them, particularly those from China and central America.  

If the Land of the Free ceases to take part whole heartedly in free trade then it is hard to see the rest of the world persisting with it on a meaningful level, despite the World Trade Organisation’s best efforts.

Another major strand of nationalist politics is restricting immigration, which directly impacts labour markets, something which can significantly affect the profitability of companies and therefore share prices. 

According to Libby Cantrill, executive vice president in PIMCO’s executive office, it is very difficult to assess the market implications of rises like Trump’s.  

“Trump does not necessarily subscribe to the conventional Republican orthodoxy of lower taxes, less spending and open markets made famous by President Ronald Reagan,” Cantrill said. “Indeed, Trump’s economic agenda is more ideologically varied – with some tenets of Republican orthodoxy, such as lower taxes across the board, and with some Democratic principles, such as preserving Social Security and Medicare. Most famously, Trump’s extreme policy position on trade, which calls for a total overhaul of existing U.S. trade agreements and possible punitive action against U.S. trading partners, such as a 45% tariff on Chinese imports, does not belong to the platform of either party.”

Part of the Bonhill Group.