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The Case for Macro

Our Dynamic Allocation Strategies team explains why global macro investing offers many potential benefits when included in an investment portfolio. Read More (PDF)

Emerging Markets Outlook for 2017

The past 12 months have been fairly turbulent in emerging markets, but a number of factors support emerging market performance.  Read More (PDF)

Rise of Populism: Peak Globalization?

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When thinking about recent attacks on the status quo, such as Brexit and Donald Trump's election, it's important to understand the continuum of globalization—how it has moved over the years, where we are now, and what it means going forward.

That's because the rise in populism, which represents a substantial departure from nearly seven decades of globalization, is a key near- and medium-term risk to any outlook.

How Has Globalization Unfolded?

As supply chains have been liberalized, as goods have been able to move freely across borders, and as companies have rationalized their production centers, we have seen better returns on capital. Capital has become much more mobile as barriers to movement have been reduced progressively. More recently, even services have begun to participate in globalization.

The rationalization of the supply chain means that the cost of goods produced and procured has declined. That not only boosts operating margins for companies, but also generates higher and more sustained cash flows and yields, as the chart below shows. And companies across virtually all geographies have benefited from this trend for many decades. This is the part of globalization we believe is at risk of partial reversal.

Globalization has also affected the corporate sector through fewer restrictions on capital mobility and flows, effectively eroding national sovereignty over tax rates. In practical terms, Organisation for Economic Co-operation and Development (OECD) economies have been lowering corporate tax rates to compete for increasingly mobile capital. Similar to supply chain liberalization, the result of this trend has also been cash-flow enhancing.

The final frontier of globalization is the movement of labor—that is, immigration. To this, the social reaction has been the strongest so far.

The final frontier of globalization is the movement of labor—that is, immigration. To this, the social reaction has been the strongest so far. When U.K. Prime Minister Theresa May quipped that if you are a citizen of the world, you are a citizen of nowhere, she was attacking people that feel they have something in common with those living thousands of miles away in different countries, much more so than with their national compatriots. Our globalization infographic illustrates this point in another post.

Sometimes change can move too fast for societies to digest, and a pause is warranted. We collectively have celebrated creative disruption for so long that it is easy to forget its impact on those being disrupted. Some of the backlash we are seeing may be a response to this. We are optimists; we believe that this frontier will be crossed as well. But the near-term backlash is a real risk nonetheless.

In the near term, the political impact of this will be particularly aggressive. Significant elements will attack the status quo across multiple countries.

In the near term, the political impact of this populist backlash will be particularly aggressive. Significant elements will attack the status quo across multiple countries.

In the United Kingdom, what is most interesting in a post-Brexit world is the lack of planning from the current administration: to say that there is no plan is to actually overstate the level of planning. Prime Minister May will supposedly trigger Article 50 by March, but what that will mean is difficult to understand. There is significant uncertainty, and it will continue for some time.

In the United States, we believe corporate tax reform will be ongoing. There seems to be some coalition around individual tax rates coming down 300 to 500 basis points. As for other presidential campaign promises, some of the positions being filled by the new administration might give us an indication of prospective policies. But we are not sure how Congress will act.

In Europe, we will see a significant number of referendums and general elections in the next several months.

So, the potential for a further push against the status quo can occur. In other words, political uncertainty continues to cloud the outlook.