The growing wealth divide across the developed world is leading to a new political environment, one where people increasingly vote against the status quo. Brexit and Trump are key examples of this, but are by no means alone.
Populist parties and nationalist voices have also been rising across Europe, leading to great shifts and often dangerous departures from established political identities. The increase in support of anti-establishment parties is, in part, a result of greater inequality. It is also linked to the perceived threat of immigration, both in Europe and the US.
This political backdrop is important for investors to consider, as it is also closely linked to changes in government and monetary policy, and therefore investment markets and our clients’ capital and financial futures.
As one of the UK’s leading investment managers, LGIM offers knowledge and experience that can bring real benefit to investors looking to understand economics, policy and politics. It’s this diverse wealth of expertise which enables our asset allocation team to provide the latest political news and insightful articles on these movements.
Our Asset Allocation team includes dedicated and accomplished US, European and Global economists, whose focus is to assess the macroeconomic environment across the developed world. This includes researching government policy, emerging political trends, as well as the outlook for economic growth and inflation. Our economists then work with our team of strategists and portfolio managers to translate their views into what this means at a portfolio level.
“We trust that the government will take all the appropriate actions” – Jean-Claude Trichet. Mario Draghi. That was the sign-off for the now infamous ECB letter sent to Silvio Berlusconi’s government during the height of the European sovereign debt crisis. Nearly seven years on, Italy has once again experienced financial market turmoil and the ECB this week will no doubt be asked many questions about the situation.
Remember the EU referendum? The City thought the British public would see the economic benefits of EU membership and not wish to loosen ties with our closest trading partners. Turns out the City was wrong and had misread the mood of the nation. The current discussion around nationalisation has some worrying similarities, so is the City making the same mistake again?
How does the potential trade war look from China’s angle? Although a full-blown trade war between the US and China is not our base case, there is still a lot to consider. The macro impact currently appears to be very manageable, although even if it all blows over, we observe a tectonic shift in the US-Sino relationship.
Just like cars, it costs more to maintain an older person than a younger one. Government borrowing could rise by 3% of GDP over the next 20 years as a result of ageing. To offset this, the UK government has squeezed the rest of the public sector in an attempt to balance the books. This seems politically unsustainable. Is the government about to reverse course by ending public sector pay caps?
Sterling-based investors face the additional uncertainty caused by the Brexit vote alongside the usual vagaries in markets. When in doubt, it can be tempting to extrapolate recent performance, however today that could prove unwise.