Very recent developments provide further evidence that politics has entered a new era, characterised by fragmented political landscapes, the re-emergence of extremist parties and self-determination at a national, or regional level.
Last week, Spain’s Prime Minister Sánchez called a snap general election for April, after Catalan nationalist MPs withdrew support for the budget, as talks over the right to self-determination broke down. These are unusual times, as this is only the second time a budget hasn’t been passed in Spain’s post-Franco democracy.
Sánchez only came to power last spring, following a no-confidence vote against the previous prime minister. Like many other countries, Spanish politics had previously been dominated by a two-party system, but polls show that new elections would be unlikely to return a majority party.
Just as the Catalan question is dominating Spanish politics, so the “B-word” continues to dominate UK politics, with the Irish backstop a key stumbling block. This week saw a “split” in the Labour party, some citing the “B-word”, some citing a lurch to the left by the Labour party, but it will likely go down as a non-event, unless more MPs join the group soon.
Recently too, Italy’s deputy prime minister met with the head of France’s yellow vest movement, leading to escalating tensions between Italy and France, which previously had been a generally stable axis in the region. European elections in May will provide more visibility as to the degree of anti-EU feeling within the EU.
This is by no means just a European phenomenon – new Brazilian far-right president Bolsonaro is not a member of either of the main parties. Trump, whilst officially representing the Republican party, is certainly not considered a typical Republican, neither is Alexandria Ocasio-Cortez considered a typical Democrat; they both represent the more extreme policies within their parties.
So, what does this mean? In the short-term, expect increased political instability, which is unlikely to see progress made on the burgeoning in-tray, just look at the UK over the last two and a half years. Markets don’t like uncertainty, whether it’s political or otherwise (take trade tensions, the US shutdown and the “B-word”). If politicians can’t provide acceptable solutions in the short-term, maybe other policy makers will step up, such as central banks. Political instability will only be compounded by, for example, financial market or economic instability.
In the medium to long-term, if populists gain increasing power, expect even more of a focus on short-term ‘solutions’, as well as pressure for pro-growth policies, pro-employment policies, fiscally lose policy and reduced independence of central banks.
More government debt and more inflation don’t bode well for government bonds, though this is probably not for now. More generally, there are ways of diversifying against these types of domestic political risks, for example by also investing in areas like China, that aren’t exposed to these dynamics, and gold which has proved a good hedge against geopolitical risk.
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Investments in emerging markets are potentially higher risk than those in established markets.