Schroders expert sees growing political risk
Expect inflation and interest rates to climb in the US against the backdrop of a rising tide of support for far-right, populist parties in Europe.
That is the outlook of Azad Zangana, senior European economist and strategist at London-based investment house Schroders, who described a challenging environment for investors.
In an interview, he added that emerging markets were likely to be a bright spot in the global economy in the coming months.
Mr Zangana, a frequent contributor on business outlets such as Bloomberg Television, Fox Business and CNBC, was on the island last week to give a presentation at the eighth Schroders Investment Conference in Hamilton.
He said the election of Donald Trump as US President was the latest demonstration of a growing anti-establishment vote among voters in much of the developed western world — something investors need to be aware of.
“The anti-establishment movement started off in Greece, escalated with Brexit and continued with the US election results,” Mr Zangana said.
And with a referendum that could potentially bring down the government in Italy, followed by major elections in Austria, France, the Netherlands and Germany all due before the end of next year, there are numerous opportunities for popular discontent to stir up the political landscape within the European Union.
The Italian referendum on constitutional reform, scheduled for December 4, is designed to reduce the instability of the country’s political system, but opponents say it will give the government too much power.
“The potentially destabilising thing is that Matteo Renzi, the Prime Minister, has said he might resign if he doesn’t win, Mr Zangana said. “He’s really staked his reputation on winning and making these changes and so this could lead to volatility in the markets.
“If there is a ‘no’ vote and the party [the centre-left Democratic Party] can’t find a replacement quickly, there could be a snap election, which could open the door for populist parties like the Five Star Movement to do well.”
Recent polls have consistently shown the ‘no’ campaign ahead.
Also on December 4, there is an election in Austria for president, largely a ceremonial role. Mr Zangana said the far right candidate was likely to win. He added that this could set the stage for the president calling a general election at some point next year in which the far right could do well.
In France elections are due in April and May of next year. Far-right candidate Marine Le Pen has strong support and has between a quarter and a third of the electorate behind her, according to recent opinion polls.
“Le Pen is expected to make it to the second round, but then the socialist support would be expected to fall behind her rival — probably either Alain Juppé or Nicolas Sarkozy, so she most likely lose,” Mr Zangana said.
“But if France has the same electoral system as the US, then Le Pen would probably be the next president.”
Le Pen supports following Britain’s lead and leaving the EU.
“If France were to pull out — or Germany — that would be the end of the eurozone,” Mr Zangana said.
In the Netherlands, the far-right party is expected to win March’s election, Mr Zangana added, but not by enough to be able to force an exit from the EU.
The German election is slated for the second half of next year. The far-right Alternative fur Deutschland party has been gaining support and could potentially earn between 10 and 15 per cent of the seats in the Bundestag, Mr Zanagana said.
“Right across all of these countries we are seeing a strong anti-establishment vote from people unhappy with the effects of globalisation and inequality, made worse by the lack of economic growth over the past few years,” Mr Zangana said.
He added that some investors did well amid the big market moves triggered by political events and many funds would have hedges in place.
As for Mr Trump’s election, Mr Zangana said much uncertainty remained about what the new administration would do and what level of support it would get from the US Congress, in which both houses are controlled by Mr Trump’s Republican Party colleagues.
“I’m not sure that there has ever been a US President who has faced such obstacles from his own party,” Mr Zangana said.
“At face value, it seems that Mr Trump plans to cut taxes aggressively and increase infrastructure spending. A lot of Keynesian economists want to see this focus on fiscal spending. But we would also see a big increase in the fiscal deficit, along with higher bond yields and interest rates.”
One area where Mr Trump could act without requiring the approval of Congress would be on trade deals. He has promised to scrap Nafta, the agreement that lowered trade barriers between the US, Canada and Mexico, for example.
“This would be a negative hit to growth and lead to higher inflation,” Mr Zangana said.
Inflation was highly likely to tick higher early next year, driven by energy prices, which have risen substantially from their low points early last year.
He added that he expected the US Federal Reserve to raise rates in December and twice more next year.
Mr Zangana said emerging markets were well placed to perform well, apart from Mexico. “They have come through the recession and we are seeing stability in their currencies and inflation coming under control to the point that some central banks have started cutting rates,” he said.
Schroeders liked Asian countries, he said, particularly with China boosting activity through stimulus, while the battered Russian and Brazilian economies were poised for growth, as commodity prices recovered and interest rates came down.
Schroders has assets under management of around $468 billion and counts several Bermuda companies and wealthy individuals on the island among its clients.