Why populist politics could be good for markets

After a raft of political surprises in the past year, attention turns to the first round of the French presidential election. Keith Wade explains why this is such a big deal for markets and why populism can actually be positive for investors.

20/04/2017
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Authors

Keith Wade
Chief Economist & Strategist

Politics has become a big focus for investors over the last year. Mainstream centrist parties are losing votes and populist parties are gaining ground.

Following the Brexit vote and the election of Donald Trump, markets have been quite strong. So it could be argued that populism is good for markets.

More than politics driving markets

But there have been other factors at play. First of all, we have seen a global recovery taking place at the same time which has obviously helped markets.

Also, the UK market has obviously benefited from the fall in the pound and we had a cut in interest rates. These things which followed the Brexit vote have been very supportive.

Doubts creeping in

Looking ahead at the moment though, the fall in the pound is leading to higher inflation in the UK and that’s beginning to squeeze consumers. This will slow the economy down. So, there are a few doubts about the market benefits of populism creeping in.

Of course, the UK has just started the trade negotiations having triggered Article 50 and that’s creating additional uncertainty (as is the snap general election announced after this video was shot). That seems to be having an adverse effect on capital expenditure.

The US and the reflation trade

For the US, it’s a slightly different story. Donald Trump’s pro-growth agenda has really boosted confidence in the markets and that’s been one of the factors behind the strong rise and outperformance of US equities.

However, even in the US, markets have had some doubts about what we call the reflation trade. Fiscal policy for example may not be as supportive as investors had hoped. Donald Trump is having trouble getting some of his policies through Congress. This might slow down the reflation trade going forward.

France in focus

The current area of focus is Europe. The French presidential election is coming up and again there are populist parties who are running for power, with Marine Le Pen of the Front National looking like she could win the first round.

We don’t expect Le Pen to win the second round. We think that there is a big difference between the French election and what happened with Brexit and with Donald Trump. That is, Marine Le Pen is more of a known quantity so we’ve got an idea of how much support she can really generate, whereas Brexit and Trump were completely new.

Should Le Pen win, she is also promising a referendum on France’s membership of the EU. If she were to win that, there could be very big consequences for the markets, because it would mean that France would leave the euro.

However, we don’t think that is likely to happen. In some ways the pressure that’s being created by the populists in Europe could be positive as it could shift the EU towards a more pro-growth, pro-fiscal policy agenda. That could ultimately be good for markets.

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Authors

Keith Wade
Chief Economist & Strategist

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