By Paul Warner, 3 April, 2017

You can't pick up a paper these days without hearing about populism and how this type of politics is likely to affect markets going forward. So what exactly is it? The Oxford dictionary says that it is “Support for the concerns of ordinary people”, which doesn't really do justice to what people mean by populism. Wikipedia gets closer to the mark with: it “is a political doctrine that proposes that the common people are exploited by a privileged elite, and which seeks to resolve this. Its goal is uniting the uncorrupt and the unsophisticated "little man" against the corrupt dominant elites (usually established politicians) and their camp of followers (usually the rich and the intellectuals)”.

As readers will know it is our view that politicians and markets don't mix. The less politicians do, or can do (like in a hung parliament), the better. There is little doubt that in the short term populist politics is having an impact on markets. Brexit was the first demonstration, and then Trump. Fears that Geert Wilders would do well in the Dutch elections, and Marine Le Pen will do well in the upcoming French elections have all made markets move. For example the spread between the yield on German bonds compared to French bonds widened significantly as the Le Pen's popularity rose. So far it is clear that the results of populism have only had a short impact on markets. Even the supposed 'Trump Rally' really had its origin in the improving economy. Some of the expectations of what he could do to the US economy may have lifted the market by a few extra percent, and he has definitely had an impact on economic sentiment. However, at a recent internal investment meeting the questions were asked: “If tax cuts, deregulation (especially for banks), and a huge infrastructure spending plan were enacted tomorrow, what would markets do? How much is already priced into shares?

The point is these things will not be enacted tomorrow and it is plausible some may not be enacted for a year or so, if at all. Will the party of low government spending, the Republicans, really enable a $1 trillion infrastructure spend without making cuts in other areas?” These questions were posed before the new administration withdrew the abolition of Obamacare from a vote, when it was clear the vote would be lost. The quorum of republicans that would have voted against would have done so because they thought the changes didn't go far enough. In other words they didn't save enough money. It will need some very clever political manoeuvring (something so far missing from Trump's repertoire) to get a $1tn infrastructure spend agreed. The more important question is whether the current populism is the inevitable back swing of the pendulum caused by Liberalism going too far, or whether it is much deeper and could affect the longer term well-being of markets.

Populism in the 1930s was a global phenomenon, interestingly helped by a debt crisis in most instances. It was far more strident than now, as in most developed countries there are still the checks and balances as per the Obamacare non-vote, which should ensure the extremes of the past are not revisited. Current populism could yet prove a cause for the good, for example making Europe more flexible. The irony is that the very modern media, which enabled Trump to get in, should also act as a check against populism becoming extremism.