Pondering Populism: Our Views on an Emerging Geopolitical Trend
What does the rise in populism and growing geopolitical tensions mean for investors? In a recent panel discussion, some of Janus Henderson’s thought leaders exchanged their views on the topic from both an equities and fixed income perspective.
- The rise of populism and growing geopolitical tensions will likely bring increased volatility in the years ahead, which in our opinion makes active management more important than ever.
- Central banks and regulators will need to make changes to accommodate the rising populist agenda; some central banks have already shifted their mandates to include broader measures than pure inflation targeting.
- Trade friction has put financial pressure on many global companies, making it necessary to gauge the stability of each company’s supply chain when evaluating investment opportunities.
The rise of populism is one of today’s most prominent political developments, influencing not just geopolitics but also the direction of financial markets. With this backdrop in mind, some of Janus Henderson’s investment managers provided views on the implications for investors during a recent panel discussion. The following is a recap of the conversation.
Nick Maroutsos, Co-Head of Global Bonds, believes active management is more important than ever when evaluating fixed income securities. In an environment where yields are low, credit spreads are tight, geopolitical risk is high and populism is taking off, he argues investors need to seek out strategies that are more nimble and innovative.
From his perspective, understanding the “country factor” – the idea that, globally, there is a range of public opinion – is critical to identifying opportunities. The reason: A diverse set of views could change the trajectory of economic growth, inflation and yields among countries. For example, Japan, Canada and Germany may represent potential safe havens because they have not adopted the strong anti-globalization measures currently favored by the U.S. and the UK. The ability to target certain countries and utilize hedges seeking to take advantage of any resulting volatility are key aspects of this active opportunistic approach.
Jenna Barnard, Co-Head of Strategic Fixed Income, believes that the impact of populism will filter through to every actor in the economy. We have already seen change enacted by regulators through means of regulatory capture, and central banks will also need to make changes to accommodate the rising populist agenda. Since 1993, there has been a global consensus among central banks to target an inflation rate of 2%, but such a focus does not fit today’s populist-driven world, Ms. Barnard says. Some countries have already recognized this shift. The Reserve Bank of New Zealand changed its mandate from pure inflation targeting to inflation and growth while Norway’s central bank now targets inflation, growth and financial conditions. In doing so, the banks are trying to encapsulate a broader perspective of what matters to people – actions that could have a profound impact globally.
According to Hamish Chamberlayne, Head of SRI, several decades of globalization have resulted in complex supply chains for many global businesses. But today, trade friction and changing regulations have started to make costs untenable for some companies. He believes it has become increasingly important to gauge the stability of a company’s supply chain against today’s populist backdrop and to determine how sustainable its operating footprint is.
Additionally, he notes that reciprocity – how the business is contributing to the country in which it operates – is a key consideration when evaluating investment opportunities. Those contributions could include job creation as well as how the business interacts with the local culture and institutions. As such, Mr. Chamberlayne says it is important to focus on finding businesses that create a net positive dynamic in the countries in which they operate.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.
Credit Spread is the difference in yield between securities with similar maturity but different credit quality.