Italy has been governed by a populist Eurosceptic coalition – led by the anti-establishment Five Star Movement and the far-right League – for almost a year and the spectre of another Italian debt crisis continues to loom over the euro.
The Spanish general election last weekend saw the far-right Vox party breakthrough and win 24 seats. Over in France, meanwhile, the National Rally – the rebranded National Front led by Marine Le Pen – is polling strongly; as is the Alternative for Germany (AfD), Fidesz in Hungary, and the Sweden Democrats and Freedom parties in the Netherlands and Austria, as well as the Brexit Party in the UK.
Many of these groups claim to represent “the people” against supposedly corrupt “elites” that have been ignoring them.
“Populism offers simplistic solutions to complicated problems and that makes it very unpredictable from an investor’s perspective,” said Edward Rumble, co-portfolio manager, RWC Partners, speaking at Expert Investor’s event in Milan earlier this month.
"I worry that our problems in Europe are political and not economic and that makes the environment very uncertain.”
The simplistic solutions populists propose typically include ramping up public spending, nationalisation, price controls and bashing immigrants.
In a survey of fund selectors at Expert Investor’s event Milan earlier this month, 83% of attendees said they expected developed market equities to rise this year, despite more volatility. At the same event, more than 80% of attendees admitted they were “worried” about Italy’s populist government.
Source: Expert Investor
“While European equities are likely to hold up this year I worry that our problems in Europe are political and not economic and that makes the environment very uncertain,” Rumble said, adding that a sensible response to such uncertainty was to adopt a “style agnostic neutral portfolio”.
“We don’t try and bet on big macro or political outcomes. [The best response] is to have diversity across not only geographies but across risk styles that will guard against any shocks feeding through into your investment performance and alpha generation.”
A new challenge
The populist movements gathering momentum in Europe represent a new challenge for investors, said Otilia Bologan, a portfolio manager at French boutique Amiral Gestion.
“In the past, political conflict was something investors felt they could understand because the market typically went down – and they adjusted investments accordingly. But the situation today is different,” she said.
“The polls in big cities – such as London or Milan – suggest one thing but the populations outside these cities think otherwise. For people managing financial assets, trying to make sense of what is happening is more difficult today than it has been in the past.”
Investor responses to populism should not lose sight of “the power of the idiosyncratic driver”, Rumble added.
“Share price performance charts show that an important element driving stocks is not a new government in Italy or whether a trade war is going to kick off between the EU and the US. It’s about economics and the underlying profits those listed companies are delivering.
“In a lot of cases the economics are driven not by macro factors but by idiosyncratic factors like new product introductions, reinvestment opportunities and acquisitions creating shareholder value,” he said.
“There is a danger in the current environment that we read sensationalist headlines and lose sight of the idiosyncrasies driving share prices. On one level we need to disassociate ourselves from that noise which may be important, but not perhaps as important as we necessarily might think it is.”
Populism and Brexit
The definition of “populism” can depend on an individual’s perspective, said Gregg Guerin, a senior product specialist at First Trust Global Portfolios. “Populism by one definition is right-wing scare tactics. But populism by another definition could simply be democracy,” he said. “There will always be the concern of the day.”
The most urgent populist concern of the day in Europe remains Brexit. In April, the UK and the EU thrashed out a deal that to delay the country’s departure from the bloc until the Autumn and further delays and a second referendum remain possible.
Fund selectors in Milan were surveyed as to whether Brexit had led them to change their investment strategy. Perhaps reflecting the delay, more than more than half (56 %) said they now did not expect Brexit to have any impact on their portfolios. This contrasts sharply with fund selector surveys taken in other European cities prior to Britain’s scheduled departure on March 29 when most attendees said they were rejigging their portfolios in preparation.