AXA IM | The political landscape is currently being presented as being between ‘left’ and ‘right’, but in reality it is between the state sector and the private sector. The anti- establishment or so called populist votes are a vote against the current level of interference in markets from the state sector – with many on the traditional left complaining about ‘right wing government supporting bankers’ while those on the traditional right are complaining about ‘left wing socialist governments promoting too much identity politics’. The new wave of G7 politicians coming in, from Theresa May and Donald Trump to the new leaders of France and Italy signal a likely change in attitude that will have important implications for asset allocation and markets. This doesn’t have to be radical, but at the margin a shift from policy driven markets towards fundamentals driven markets will be quite profound in its effects, and the market is moving already. The Federal Reserve (Fed) is now appearing to follow, rather than lead markets, US Libor continues to rise, regardless of what the Fed announces next week and the stronger dollar is tightening monetary conditions in the whole dollar zone. Meanwhile and as noted last week, the recent sell off in bonds is not so much about a change in views on inflation and growth (the new narrative to ‘explain’ bond yields), as it is a normalisation of interest rates away from QE towards ‘free market’ valuations, ones which are set by inflation and growth and would be much higher.
In effect this is a move from bonds as a special interest group to being the same as other assets. Similarly, small and mid-cap stocks in the UK rallied on the prospect of improved access to markets outside the customs union, while US banks rallied on steeper (more free market) yield curves and a prospect of an easing of regulatory burdens.
This is not to say lobbying disappears, or that we are going to an era of pure free markets, rather that there is more of a ‘deal’ to be struck. Take as an early example, the deal with US air conditioner Carrier. Even before taking over, Mr Trump prevented a US company relocating abroad, apparently by offering subsidies (though $7m over a decade to keep 100 jobs looks a bargain by previous standards), but also doubtless by reminding the ultimate managers of the conglomerate just how much business they did with the US government. Ironically this was slammed as a form of government interference and crony capitalism (which it is) by the very people who have previously been happy to bail out other institutions from Wall Street to car companies. The point is not to defend either previous or upcoming administrations but to acknowledge that they will operate differently. Companies need to adjust and so do equity and credit analysts. As my colleague Nigel Thomas always says: “Things won’t necessarily be better or worse. Just different”.