The Rise of Nationalism: Causes and Investment Implications

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The Rise of Nationalism Causes and Investment
Implications

• Nationalist and populist political ideologies are
  moving into the mainstream in the United States
  and much of Europe.  Candidates who back these
  ideologies have opportunities to perform well in
  elections/referendums in the US, Italy, France,
  Austria, and Germany over the next 15 months. 
  Why did this rise of nationalism occur, and what
  are the potential consequences for markets?
• Multinational corporations have benefitted
  significantly from increased global integration
  and the resultant rise in cross-border trade over
  the past 25 years.  Meanwhile, the middle classes
  in developed markets such as the United States
  and the United Kingdom have seen their relative
  standards of living deteriorate during this
  period. 

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Candidates such as Donald Trump are successfully
exploiting this issue through promises to
implement protectionist policies, such as tariffs
on trade with China and Mexico, repealing the
Trans Pacific Partnership (TPP), and threatening
to back out of the North American Free Trade
Agreement (NAFTA), all in an attempt to bring
lost jobs and wages back onshore.Anti-immigratio
n sentiment has also cropped up alongside this
anti-globalization sentiment, furthered by
terrorist attacks and the refugee crisis in the
Middle East and Europe.  Similar themes were
evident in the United Kingdom ahead of their
Brexit vote in June, and may reappear in
upcoming votes in Italy, Austria, Germany, and
France. Thus far, Wall Street and Main Street
have been able to shrug off the momentum in
nationalist politics.  Markets breathed a sigh of
relief following the UKs Brexit vote, as initial
losses were quickly reversed and the SP 500
jumped to new all-time highs, in part thanks to
the supportive response by central banks. 
Economic data in the UK has also beaten
expectations following the vote, while implied
equity volatility remains near cycle lows.  To
some, this suggests the market will once again
climb the wall of worry.
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A more cynical interpretation is that the benign
reaction to Brexit only served to bring
nationalist politics further into the mainstream
ahead of more consequential votes in the months
ahead.  The politicians and voters supporting
these views will be emboldened by the lack of
collateral damage.  However, an Italian exit from
the euro or Trumps trade agenda have more
potential to harm the global economy and
financial markets. Italys exit from the euro
would spur large write-downs for global banks
that see their Italian assets redenominated into
lira, and Trumps anti-trade policies, if
implemented, would crimp profits for
multinationals and emerging markets.We do not
profess to have an edge in forecasting who will
win these elections or to what extent these
parties will be able to execute on the most
extreme aspects of their agendas.  For example,
the degree and expediency of Trumps policy
implementation would be influenced by the outcome
of Congressional elections, and an unraveling of
the Eurozone is still not a base case.  That
being said, we are observing investor
complacency, reflected in low implied volatility
and high asset prices, ahead of events that have
the potential to be very disruptive for markets
over the next few months.  As a result, we
continue to advocate a conservative risk posture
overweight cash and gold and underweight global
equities. Article Resource - https//www.athenaca
pital.com/blog/the-rise-of-nationalism-causes-and-
investment-implications/