From 2016 to 2018, voters around the globe flocked to populist candidates and causes. This was partly a response to the economic pain that followed the global financial crisis in 2008. It also reflected long-simmering resentment of ‘elites’ and the effects of globalization on living standards in the developed world. These problems are complex, but populist politicians put forward enticingly simple solutions. And a large part of the electorate lapped them up. As we enter 2019, the public’s relationship with populist politicians will shape the political backdrop for markets.
Donald Trump won the US presidency on a platform of trade protectionism and migration controls. Viktor Orban, known for his authoritarian policy regime, became prime minister of Hungary in 2010. Rodrigo Duterte became president of the Philippines in 2016 and has since implemented controversial and punitive policies. The Law & Justice Party has been cracking down on judicial independence since coming to power in Poland in 2015. And Jair Bolsonaro, an advocate of far-right politics, will assume the presidency in Brazil in January. In the UK, the Leave campaign — the flagship policy of populist party UKIP — prevailed in the 2016 Brexit referendum. And in Italy, the League and the Five Star Movement, two very different populist parties, were able to form a coalition government this year.
So far, the electorate has been getting what it voted for. In the US, Trump has made good on his offers of tax cuts and trade protectionism. In the UK, the Brexit process is underway, with departure from the European Union scheduled for March 2019. And the Italian government has embarked on both an expansionary fiscal policy and a program of tax cuts, albeit trimmed down from initial proposals.
But in 2019, we are likely to enter a crisis as the reality of those policies begin to bite. Elected populists will have to contend with the practicalities of government, potentially against a weaker economic backdrop. In the United States, Democratic control of the House of Representatives threatens constant investigation of the president’s affairs and complete stasis in domestic policy. To wrest back control of the news cycle, Trump will have to up the ante with eye-catching measures, such as even more aggressive trade policies. These are likely to impact his most loyal supporters where it hurts: their wallets, as tariff-induced inflation on basic imports hits the poorest families, like those in the rust belt, hardest.
In Italy, the new government is having to face the reality of governing in a coalition of two very different parties. Clashes with the EU and the impact on Italian yields have already challenged this coalition to reduce its fiscal expansion plans — though these revisions remain dubious given the lack of detail — with another election always just around the corner.
Meanwhile, the UK will reach the crisis point as the country has to contend with whatever Brexit deal is or is not reached. That will expose the impracticality of some Brexit populists who have simultaneously argued for independence from the EU and frictionless trade with it.
Markets are likely to continue to struggle to price in populism, no matter what stage it is in, and react strongly to extreme or fiscally irresponsible policies. This could, in turn, force populists to change tack. We’ve seen this with Italy just this year, with populist leaders watering down budget plans, partly in response to a sinking market reaction. The same can be said with the Brexit negotiations, where Theresa May has already shifted her stance on key issues immediately following sharp selloffs in apparent reaction to those policies.
Ultimately though, the nuances of populism mean that markets will not respond in a unified way. The fortunes of Trump will not neatly correspond with those of Orban. One thing is clear though: The most sensible response from investors would be to try to understand the detail of policies and what the first, second and third order impacts might be; as opposed to trying to second guess the whims of any one populist and extrapolate from there. Outcomes in politics are not usually binary. The likelihood of that amongst populists is vanishingly rare.