Is the world upside down? We are in a financial world where investors buy fixed income for capital appreciation and equity for income. It is also a world where there is significant change in policy and politics attended heated emotion in the typically stable developed world. Generally termed “political risk,” fast changing rules and civil discord has historically been a hotter topic in emerging markets where political and legislative machines were less well defined. But as we have discussed in prior updates, the upswell of populism globally has turned on the establishment in the world’s largest and leading nations leading to impactful change.
While the trend started long before June, the decision by voters in the United Kingdom to exit the European Union has been the most visible mark. The election this week in the United States demonstrates again that deep change is possible and occurring. Only a few days after the results of the election, the President-elect’s transition team has begun outlining their first initiatives. Much of this builds on a communication outlined in October to voters prior to the election in which a sketch of a 100-day plan was outlined. Granted, there is a difference between campaigning versus governing but should the forthcoming directives follow this outline there will be sweeping change in trade, immigration, healthcare, tax, energy policy, financial reform, infrastructure, education, military, and the Supreme Court. Details are still short and the US’s political process is messy by design, but it will be vital to evaluate both the details and the trends. Politics will be a key driver of financial markets in the U.S. and both risk and opportunity will be created. We will spend much time on this as the circumstances evolve.
We also must keep in mind that this is a global phenomenon on many levels. Not only on the primary level such as the direct results of votes such as the UK referendum, the U.S. election, or the forthcoming German and French elections. Not only on the secondary level such as the impact of elected officials decision over policy in each country. But on the tertiary and deeper levels. For example, the indicated direction of the U.S. to step away from efforts to establish the Trans Pacific Partnership (a trade agreement with Asia) will influence not only direct trade volumes and prices of goods (primary), but domestic inflation (secondary) as well as the political power of the U.S. in the region versus other large players in the region like China and India (tertiary). Thinking through all of the knock-on effects in portfolio construction will be crucial to landing on your feet.