T.Rowe Price’s head of international fixed income Arif Husain said that 40 per cent of the world’s government are already run by populist regimes and it had ramifications on investments.
“Populism is very political and contentious subject but it has some important ramifications for your clients portfolios looking forward,” he said.
Mr Husain said that fundamentally populism was a political strategy that drove people together, regardless of what side of populism you were on.
“Fundamentally it’s about fairness, we all want what is fair but the problem is none of us agree on what is fair.
“For the left it’s all about redistribution, take from them, the rich, the establishment and give it to us. For the right its very similar, take it from them, the establishment, give it to us but don’t give it to them [immigrants],” said Mr Husain.
At the heart of populism was wealth and how it was shared around said Mr Husain but it wasn’t always about just moving up.
“Certainly, Donald Trump’s base isn’t about moving up, they just want the job they used to have, they just want to do the job that their daddy was doing, just status quo,” he said.
The reason it mattered though was because of the effect these governments had on issues like property rights and even central banks.
“If central banks set independent monetary policy and the mandate they’re given by the establishment, the government, is to keep inflation low that has simply been keeping down average wage settlements,” he said.
However, there was a rebellion against central banks in populism as a bit of inflation was good for populist governments, said Mr Husain, and losing independent central banks would impact portfolios.
“If central banks aren’t independent anymore, then inflation targeting is thrown out, so think about how your asset allocation would look, with much higher and less predictable inflation. Makes it a little bit more difficult to asset allocate,” said Mr Husain.
Corporate governance was also affected by populism as there was a growing trend to have manufacturing services kept at home as opposed to somewhere cheaper said Mr Husain.
“If you have big government starting to tell companies where to produce things then the profit margins start to get eroded. The efficient use of capital starts to change,” he said.
Ultimately, populism was ingrained into the system now, said Mr Husain, and it would end on a global scale.
“It probably will end on a global scale with less trade and slower growth as countries start to isolate.
“The trend of globalisation which is a hugely important driver is starting to ebb away. Growth is flatlining and the traditional model is starting to break down,” he said.
Mr Husain said Australian investors needs to realise that populism led to higher inflation, more volatility, weaker currencies and deteriorating bond yields and credit ratings.
“You need liquidity, you need to be dynamic, your strategic asset allocations need to think about what’s coming next but at the same time you need to be tactical, because if volatility is here there is going to be plenty of opportunities to make money,” he said.
