Will Donald Trumpism Bury Davos Elitism?

Neil Dwane | 16/01/2017
Will Donald Trumpism Bury Davos Elitism?

Summary

Neil Dwane says the rumbling sound being heard by politicians and power-brokers at the World Economic Forum in Davos comes from a new political avalanche of populism – one that threatens to sweep away decades of pro-globalization sentiment and change the investment landscape.

Key takeaways

  • Populism and protectionism seem to be growing stronger around the world; consider the UK’s Brexit, Trump’s presidential victory and Italy’s “no” vote
  • These recent events – not to mention important elections on the horizon in France, Germany and the Netherlands – are not isolated incidents, but part of a new political trend
  • The previously dominant pro-globalization mindset is being challenged by its previous champions, and not by outside forces like radical Islam or communism
  • The multinational companies that benefit most from globalization are facing uncertainty; profit maximization, free trade and conspicuous consumption are in populists’ crosshairs
  • Investors should expect local and national politics to promote economic self-interest and slow global growth, while governments and corporations will want to be viewed as more responsible partners

To the great discomfort of many members of the global establishment, Donald Trump is already much more than the President-elect of the United States. He also sits atop a global political avalanche that began gaining speed in 2016 – through the pro-Brexit vote in the UK, the Republican sweep of the US elections and the resounding “no” heard in Italy’s referendum.

The rumblings of this new political force are sure to be felt this month in the beautiful chalets of Davos, the Swiss resort town that has become an annual place of pilgrimage for the most ardent champions of globalization and free trade. For decades, almost every G20 government and Fortune 500 company has sent a delegate to the World Economic Forum in Switzerland, where attendees rubbed shoulders with global power-brokers, celebrities and politicians – not to mention powerful celebrity politicians like Bill and Hillary Clinton.

But today, given the populism and protectionism that seems to be growing stronger with each passing election, perhaps the Davos elites will begin turning their eyes to the Milwaukees and Middlesbroughs of the world – the places where antiglobalization feelings are among the strongest.

In this mindset, many democratically elected governments have begun to decay precisely because they have been busy protecting their own self-interested goals – not the people they were charged to lead. So in a string of now-historic elections, those who felt overlooked and underestimated gave the boot to pro-Europe elites in the UK, opened the door to a defiantly non-establishment Trump in the US and began setting their sights on more victories to come.

As we discussed at length at our September 2016 Investment Forum, it is important for investors not to view these recent political events – not to mention the many other important elections on the horizon in France, Germany and the Netherlands – as isolated and unconnected. Rather, they are part of a continuum with deep roots.

In economic terms, one of the reasons the previously dominant forces of globalization and free trade are waning is that they have created a growing middle class in emerging markets at the expense of their counterparts in developed markets. In geopolitical terms, as the West failed to solve the challenges of Iraq and Afghanistan, the US has been toying with isolationism – which Trump campaigned upon – just as China and Russia have reasserted themselves on the global stage. All the while, South Korea and Japan’s populations continue to age rapidly, and rising populism in Europe is exacerbating that region’s existential challenges.

As the political ground shifts, the old guard is being viewed through a much different lens. The previous narrative of the pro-globalization set was that democracy and free markets would prevail, with American exceptionalism as the benchmark against which all others would be measured. That narrative is now being debunked by its own erstwhile champions, particularly Trump’s supporters, and not by outside forces like radical Islam or communism. It is becoming clear that the multinational companies who are globalization’s ultimate beneficiaries are, like the Davos elites, facing unstable terrain ahead. Profit maximization, free trade and conspicuous consumption by the few are no longer viewed as de rigueur, but are actually perceived as the problem.

Perhaps someday, the history books will need to make room for the era of globalization next to the Cold War, which also had an easy narrative of Western capitalism beating Eastern communism: By making the right choice, everyone could benefit, both personally and economically. However, as Lee Kuan Yew notes in From Third World to First, Asia was never likely to follow the Western path to democracy – not with its inherent contradictions and unaffordabilities.

Consequently, we as investors should begin to expect local and national politics to impede global supply chains and promote economic self-interest. The efficient allocation of capital will fall, which will be a drag on already-constrained levels of global growth. Yet at the same time, the new political trend will place new demands on the institutions that must deploy this much-needed capital, and there will be a growing call for governments and corporations to be seen as good partners. The practices of tax arbitrage, offshoring and profit maximization for shareholder value may soon be buried – if not wiped out completely. What is left when this storm passes will largely rest in the hands of the people who find themselves newly empowered.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This material is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan. © Allianz Global Investors 2017. 93350 | COMM-150

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Neil Dwane

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Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.

Positioning Portfolios for Political Shifts and a Changing China

Neil Dwane | 23/01/2017
China Hong Kong Harbor

Summary

In his roundup of our latest Investment Forum, Neil Dwane highlights the top themes driving markets and economies – including China’s growing role in global indices, Trump’s ability to disrupt the status quo, Europe’s super-election cycle and the “hunt for income” going global.

Key takeaways

  • Reasons for optimism: Post-Trump reflation, rising yields and a higher oil price. Causes for concern: Dull global growth, rising debt, political risks and NIRP.
  • China is on the path to becoming its own asset class, disruption is more than a tech trend, and populism and protectionism are powering the new politics.
  • We continue to urge our clients to take risk to earn returns. Much-needed yield potential can be found in US and Asia high-yields, EM debt and European equities.

Our first Investment Forum of 2017 was held in the vibrant city of Hong Kong – a fitting location for an event with China as the lead agenda topic. Politics and disruption were the other big topics of the day, and all three themes converged in our recurring discussions about Donald Trump’s ability to disrupt the political status quo – particularly US-China relations.

The state of the global economy

Although global economic growth has remained somewhat dull, it accelerated slightly in the second half of 2016 – and the markets responded. Reflation hopes soared after Trump’s victory, despite uncertainty about his priorities. If Trump successfully lowers taxes, reduces regulations and increases infrastructure spending, the US should be able to extend its late-cycle growth. Globally, rising bond yields and a higher oil price are also cause for optimism. Of course, there are also legitimate reasons to be cautious. As the memory of the Great Financial Crisis recedes, global debt levels are rising. Moreover, euro-zone banks continue to appear risky, and we expect the central banks of both Europe and Japan to row back on their negative-interest-rate policy errors.

China: An asset class in its own right

Although not without its issues, China is making the necessary changes to succeed in the long term. Consider how China battled deflation and a commodities collapse: Their aggressive monetary-policy changes successfully restored profits, inflation and the profitability of state-owned enterprises. Moreover, China is at least confronting key structural issues by “rebalancing”, and while high debt and slower growth are problematic, China acknowledges the need to reform and has the will to do so – unlike Europe. Still, Trump presents a wild card: His policies could hurt trade relations, China’s “One Belt, One Road” policy and China’s longer-term regional ambitions.

In the end, however, China’s overall trajectory is clear: It boasts the second-largest economy in the world and has more listed companies than the US does, giving the country 18 per cent of total global equity-market capitalization. Yet China currently makes up a mere fraction of the world’s leading market indices, which don’t include China’s onshore markets. As China’s rebalancing and reforms continue, this should change. In turn, more investors will join us in considering China to be its own asset class.

Disruption is more than a tech trend

Artificial intelligence has been an enticing tech story since 2012, when machine learning, new algorithms and processor advances aligned with deep storage capacity. Although AI is in the early adoption stages, it is contributing to faster automation of previously manual work. This disruption could lead to efficiency gains, but it could also exacerbate income inequality, prompting governments and regulators to step in. Companies that thrive off disruption could also shift the investment trend away from indexing: With the top 20 per cent of companies accounting for all of the US market’s gain in 2016, actively picking stocks looks like a much more attractive proposition. For our part, our research team is adapting to this theme by implementing new “disruption ratings” on the companies we cover. We may find that future success in any industry requires embracing a new mindset: You will be disrupted, so get busy disrupting!

Populism and protectionism power new politics

As part of the changing political trend that is moving away from globalization and free trade toward populism and protectionism, European politics will take centre stage in 2017: Brexit negotiations should begin in earnest and a “super election cycle” will roll through the Netherlands, France, Germany and possibly Italy. Regardless of Brexit’s ultimate shape, the European Union may be keen to help the UK make its exit before the EU’s Parliamentary elections in May 2019. Another factor pressuring the region is that many feel the EU has too many members and therefore must “shrink to grow”. So while it is possible for Europe to muddle through 2017, the EU needs to build a vision and roadmap that is sustainable – and the clock is ticking. In the US, politics could play a major role in the future course of monetary policy: Trump may have an opportunity to appoint six out of seven members of the Fed’s Board of Governors.

Key considerations for investors

Here are five of the more significant opportunities and risks for investors to consider:

  • As China assumes a larger role in major global indices, it should play a larger role in investors’ portfolios.
  • Europe may remain mired in a depressing political cycle, and European financials appear risky.
  • Although still expensive, US equities may have room to run if Trump’s fiscal stimulus and tax cuts come to pass.
  • As the “hunt for income” goes global, much-needed yield potential can be found in high-yield bonds in the US and Asia, as well as in emerging-market debt and European equities.
  • Overall, we continue to urge our clients to take risk to earn returns – a stance that has been validated time and again by the market’s results.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

96880

Expert-Image

Neil Dwane

linkedIn
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.
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