Populist uprising and protectionist movements that are trending worldwide are poised to impact investing activity in negative ways, according to views compiled by Portfolio Adviser.
Key Message
Listen to the trends, study history. Prioritize capital to projects with short payback periods over those with higher internal rates of return and longer time horizons.
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Uncertainty means it will also be more difficult to predict future returns. Such an environment is negative for assets with long duration, be it bonds or equities, says Gervais Williams CEO of Miton, a London-based asset manager that focuses on small to mid caps. “Therefore it seems appropriate to prioritise those companies with capital projects on short payback periods over those with higher internal rates of return that stretch off further into the future,” he adds.
A combination of populist fiscal policy and protectionism will also fuel inflation, another red flag for long-duration assets. “This could lead to a derating of company valuations and to a trade away from bond proxies to cyclicals,” says Keith Wade, chief economist at Schroders.
Short-duration assets and companies with low investment needs could therefore be relative benefactors of deglobalisation. But overall, the effect will be negative. “A retreat in globalisation probably won’t improve people’s lives,” says Williams. But protectionism would have an unintended consequence that could prove beneficial in the longer term: it would bring a recession closer, which is long overdue, he believes.
“I don’t want a recession, but it would invigorate the economy,” says Williams.
Source: Portfolio Adviser
