Populism, Protectionism and the New Normal

December 12, 2016

By Patrick Ercolano, CFA, MBA
Portfolio Manager

I remember watching a television news story where John F. Kennedy declared:  “I am talking about genuine peace, the kind of peace that makes life on earth worth living, and the kind that enables men and nations to grow, and to hope, and build a better life for their children—not merely peace for Americans but peace for all men and women." What an inspiring speech!

For as long as I’ve been alive, we’ve enjoyed a “Pax Americana”: an era of relative economic growth and stability. If you’re not familiar with this term, it refers to the peace among great powers established after the end of World War II.

Populism and protectionism on the rise

Times are definitely changing.  People are increasingly unsatisfied with their economic situation—whether it’s poor job growth, stagnant wages or income inequality.

Across Europe, and here in North America, we’ve all been watching voters voice their frustration with the status quo via Donald Trump’s election victory and the U.K.’s decision to exit the European Union. Even Italy’s vote to oppose legislative reform was driven to oust Prime Minister Renzi. Growing protectionist rhetoric is threatening globalization.

Could we be entering a phase of deglobalization? Yes, but expect this to take some time. A lot of time, actually.

From my perspective, it’s been interesting to see that market reaction in relation to these events has ultimately been positive, with the media’s “end of the world” rhetoric proving to be overdone. I’m not surprised.

The Anglo-Saxon world (the U.K. and the U.S.) is moving towards the political centre, from the right. Unlike what the media is saying about becoming increasingly “Europskeptic”,  the median voter in continental Europe is also going to the centre, from the left. The way I see it, the centre is going to be a very busy place. 2017 will be an exciting year for political nerds like me!

Uncertainty is the new normal

We can expect uncertainty to continue to unfold with The Netherlands, France, Germany and potentially Italy, holding elections over the next 12 months. These four countries account for 71% of the currency union's GDP and 66% of its population.1

While global events are important, and something we manage here at MD through our tactical asset allocation process, our focus is on choosing quality companies with strong fundamentals – regardless of what’s happening in the political world. MD is underweight in international equity, international financials, and in particular Italian banks, which should position us well for negative reaction.

Going forward, I expect to see global political uncertainty as the new normal. Although financial markets don’t generally like uncertainty, they have recently proven their resiliency, following political shakeups. And that’s good news for all of us. 

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