The Economics of Populism

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The populist phenomenon has grabbed headlines since last year, but unlike many political trends, this one has the potential to create significant global headwinds for economic growth and markets. For investors, understanding this force is critical to positioning portfolios actively in a changing landscape.

Despite differences, most populists are anti-globalization
The populist movement certainly does not share a uniform agenda, particularly in its approach to business and markets:

  • Some populists – such as US President Donald Trump or Geert Wilders, head of the Netherlands’ PVV party – have policies that are explicitly market-friendly.
  • Others – such as the Syriza party in Greece or Marine Le Pen’s Front National – pursue significant state intervention into business life, which markets as a general rule do not tolerate well.

At the same time, most populist groups have, with a few exceptions, several tenets in common:

  • the aim to foster national sovereign rights at the expense of multinational organizations, such as the EU or UN;
  • the desire for more direct democracy;
  • the promotion of anti-immigration policies;
  • restrictions on the free movement of goods and services; and
  • the goal of addressing inequality.

Many of these principles manifest themselves in agendas that are explicitly or implicitly anti-globalization, which we believe is one of the key reasons for populism’s rise and appeal.

The pendulum has swung away from globalization
Globalization and the liberalization of goods, services and employment markets gained traction around 35 years ago, and they generally lifted societal well-being and reduced overall levels of poverty. However, globalization did not only spawn “winners”; a significant constituency within Western societies “lost” in relative terms. Consider that income inequality is at multi-decade highs in many economies, and that long-term economic growth in the developed world is still moderate by pre-financial-crisis standards.

This makes the shift toward populism not entirely surprising, particularly if one follows the argument of Harvard economist Dani Rodrik. He believes that societies cannot pursue globalization, strong nation-states and democratic rights at same time: One objective always has to give. That may explain why today, the pendulum may be swinging away from deep economic integration and toward individually stronger nation-states.

Investment implications of populism
From an investment point of view, the growth in populism could have several long-lasting implications for growth and markets.

  1. Anti-trade and anti-immigration policies limit the international division of labour and are detrimental to productivity, which is the key driver of economic growth over time. Consequently, long-term growth is likely to be capped globally.
  2. Anti-globalization policies are inflationary, since they make imported goods more expensive. As a result, inflation is set to rise, as is the premium investors will pay to compensate for the eroding value of their capital over time.
  3. When populist governments implement policies that redistribute wealth, the wage share will likely increase and the profit share decline. If past experience is any guide, this may create a headwind for risk assets.
  4. Countries that implement fewer anti-globalization policies should enjoy better growth. Germany, Canada and Japan seem to be “safe” among the world’s major economies, but even countries with populist governments could have very different economic policies. Consequently, we expect to see far greater dispersion of economic growth rates, which are near a two-decade low.
  5. Emerging markets are at risk because they benefited most from globalization in the first place. As a result, they must shift their focus away from exports to the West toward consumption-driven growth and intra-regional trade. The Regional Comprehensive Economic Partnership in Asia is a step in the right direction.
  6. With economic policy uncertainty increasing as populists make gains, one would normally expect higher prices for risk premia. Yet last summer, improving cyclical data began masking the negative investment repercussions of the populist wave. As time goes by, however, the markets may grow more concerned about heightened political uncertainty.

Investing in a time of populism
The rise in populism is a clear signal from voters who feel left behind by globalization and have suffered from growing income inequality. It is also a trend with potentially serious headwinds for both economic growth and markets, though this fallout will likely be felt more over the long term than in the immediate future. This provides active investors with the time to position their portfolios to take advantage of the opportunities and manage the risks associated with this powerful political force.

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Important Information
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585,, 1 800 926 4456.


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