Asia Essentials

In the latest issue we discuss various forms of populism and historical evidenceregarding its economic and investment impact.

Whilst the word populism derives from the Latin word for ‘people’, it signifiessomething far more sinister than simply reflecting the will of the ‘populus’. In itsmodern sense, it implies that somehow people were deprived of their rights bythe elite. Populism sits easily with both extreme left and right who claim torepresent ordinary people in their struggle to restore their right to be heard as anexpression of pure ‘will of the people’. It is usually couched in terms of classstruggle for the left (‘billionaires corrupting our system’) or in nationalistic terms(‘build that wall’; ‘protect our people’) by the right. Hence, whether it is Sanders,Warren or Corbyn on the left or May, Le Pen or Trump on the right or indeedtheir more extreme cousins (Chavez in Venezuela or Kirchners in Argentina),manifestos of populists are usually wrapped in the colours of popular movementsagainst the elite (‘drain that swamp’). Given that the electorate is suspicious thatit might be a victim of a ‘bait-and-switch’, it tends to gravitate to the extremes.

Populism only becomes a strong force at a time of severe dislocations.

What has been the economic impact of rising populism? As academics debatewhat is meant by populism and its link to economics, we take a simplerapproach. To us, populism basically implies an aggressive use of the state toachieve whatever objectives that populists believe are important. The mostcommon economic strategies are price controls (reduce perceived speculative‘price gouging’); direct state subsidies (reduction in poverty and/or protection oflocal industries & employment); state-facilitated infrastructure investment (viadirect investment or indirect sponsorship of private sector); wealth re-distribution(expropriations and nationalizations); trade and capital restrictions (anti-dumpingduties; tariff hikes; aggressive use of local taxation and licence laws); and finallya significant rise in fiscal deficits, sometimes funded by CBs. Essentially, all ofthe above strategies aim to bend economic rules to satisfy political objectives.

There is extensive academic literature suggesting that populism is bad foreconomic growth and prosperity but also for most investment classes. Highergovernment spending and higher inflation tend to eventually kill both equities andbonds. Protectionism and de-globalization reduce economic efficiency and LTgrowth rates. There is no evidence that lower corporate taxes or repatriation ofprofits lead to higher non-residential investment, unless the state underwritescommercial risks whilst trickle-down economics has been discredited decadesago. In order to make a meaningful difference, the state has to eliminate bondmarkets as the binding constraint via merger of fiscal & monetary policies. Thisimplies an ability to spend without borrowing whilst restraining currencies. Itwould leave the state unconstrained to spend without negative feedback loops.

However, how long does it take to reverse the initial excitement of a narrative ofhigher fiscal spending and lower taxes? Investors are currently desperate forgrowth and want to escape CBs ‘clutches’ and, hence, the ‘honeymoon’ periodcould be longer than usual. However, sooner or later adjustment always occursthrough bond and FX markets. Hence, the state might need to eventuallyeliminate both. In the meantime, investors are embracing the new environment,with cyclicals and value outperforming growth, particularly since the USelections. However, the ‘pain trade’ could easily reverse, as the cost of capitaland bad debts rises. Our core portfolios (‘Quality & Sustainable growth’ and‘Thematics’) are thus far weathering the pressure, within Asia ex and Global.