The dominance of politics: investment implications

Amundi
By August 30, 2018 09:33

The dominance of politics: investment implications

Global Investment Views 

Concerns about trade continue to take centre stage. While US assets have so far been resilient amid escalating protectionist rhetoric, markets targeted by tariffs are under pressure. We still don’t believe a full trade war is likely and we still expect decent economic growth, though decelerating and less synchronised, and with only mild inflationary pressure. But, trade disputes could impact business confidence and investment plans, interfering with central banks (CB)’ interest rate normalisation processes. Trade talks are just the tip of the iceberg in a more complex geopolitical world. In our view, we have entered a new era of the dominance of politics vs economics. New forces, more inward-looking, with nationalist nuances are now underpinning new political agendas all over the world. Bilateral relationships are likely on the rise vs multilateralism; threats to globalisation could come more into play. This new order could influence markets in many ways. First, due to permanently higher levels of geopolitical risk. These risks are not easy to price and can create short-term volatility, but also have long-term implications. This means that predictability of a central scenario that underpins investment decisions decreases significantly, and with it, the opportunities for strong directional risk exposures. Second, due to trade tensions, global growth will not necessarily lead to global trade growth. This new order, with forces at play pointing to further fragmentation, resulting in divergences in economic and market performances, implies a reorientation of strategies towards more domestic/autonomous stories. International diversification that did not work properly in the last 30 years, due to correlation of markets to global trade factor, should do better going forward. Global and diversified approaches become paramount to taking advantage of opportunities in this new framework. Third, on a medium-term perspective, the more proactive/expansionary fiscal policies promoted by the populistic wave will put pressure on public debt and fiscal sustainability. This is of particular concern considering that total global debt skyrocketed to USD 250tn in 1Q18. Fourth, we may see mounting political pressures on CB, especially in the US. The threat to CB autonomy and credibility is a risk not currently priced into the market. Deficit and debt monetisation could become the ultimate temptation. 

Amundi
By August 30, 2018 09:33

SEARCH