Whatever next?

Anyone else with déjà vu? We’re clearly in the midst of seismic shifts in the political landscape that may be more fully realised next year after a run of major European elections.  So, do we need to rethink…well…everything? What does it mean for the ability of companies to raise, preserve, optimise and invest capital if fundamental economic orthodoxies break down? 

No certainties

Apparently, £5 waged on premier league win for Leicester, Brexit and a Trump victory at the start of the year would have netted £12.5m.   It’s funny how in hindsight none of these events seem that unlikely – but this just shows how much the world has twisted on its axis in the last nine months. (Not to mention the changing economics of the Premier League.)

Of course none of this happens overnight, but the two election results bring the concerns of those who feel economically and socially disenfranchised into much sharper focus. And what we’re seeing is voters choosing politicians offering policies that walk back decades, if not centuries of orthodoxy on the economic benefits of globalisation.  Orthodoxies like the efficacy of free trade and independent monetary policy, trust in governments and ‘experts’ and the idea of the US economy as the lynchpin of it all.

We could badge this as a protest vote – a delayed reaction to the global financial crisis – but that would underplay both the conviction and the real concerns of those who voted. Globalisation hasn’t worked for many people for a long time, with technological change exacerbating the impact on jobs and wages. Meanwhile, governments have struggled to understand and ameliorate the effects and anti-establishment parties have gained momentum. This didn’t come from nowhere.The IMF produced a paper back in 2000 entitled: ‘Globalization: Threat or Opportunity?’ which noted the concerns of low-paid workers and those in “old industries” and encouraged governments to put “in place measures to help those adversely affected by the changes.” .

So, what does this changing political paradigm mean for companies’ The Capital Agenda, i.e. their ability to raise, preserve, optimise and invest capital? 

The uncertain narrative

One of the most obvious problems is that although we’re talking about a change in paradigm, this isn’t a single unified movement with cohesive policies. Old certainties are under fire from all sides of the political spectrum. Each movement has different priorities and policies that are still developing – but at the same time gathering enough momentum and support to influence mainstream parties.

This all makes it harder to for companies plan and predict. It’s a state of flux that also leaves investors on alert to every nuance and markets are likely to remain volatile as a result. It’s not the only contributor, but together these rising concerns are exposing existing vulnerabilities – such as Italian banking – as investors reassess risk. In a similar vein, we’ve seen a number of IPOs withdrawn in the last few months, despite ostensibly buoyant equity markets – highlighting underlying tensions.

The sheer weight of QE in the system may be masking some concern in equity and debt markets – where else is money to go? But, as we’ve said before low yields have taken investors into some interesting places and a change in risk perception could change equations rather abruptly.Emerging markets have seen significant inflows in 2016, but are now  looking increasingly vulnerable to outflows.

The broad sweep of change

This uncertain narrative means that detail is beyond us at this point – a lesson learnt from Brexit.  But, there are some common unifying themes that are already influencing companies and markets. One of the most obvious is a turn inwards that puts a greater focus on domestic spending and protecting domestic industries and jobs. Fiscal stimulus has come back on the agenda in 2016. Meanwhile, new trade-restrictive measures have been outpacing the number of new measures to support trade around the globe – including import tariff rate hikes, domestic content requirements, or export subsidies.

The pivotal shift to fiscal stimulus could have a profound impact on capital markets. There are focused effects, such as the benefit for construction stocks and a universal lift and opportunities that comes from any increase in fiscal spending – at least in the short-term. But this spending has deeper implications for inflation and bond yields – which are now rising across the globe in response. Given the on-going global battle against deflation and the hit to pension funds worldwide, some element of uplift is welcome. But, there is a knock-on impact if inflation forces central banks to raise rates faster than they would like and if wage and material inflation hits already tight corporate margins. It’s question of pace – and this is going to be hard to judge.

Yields are still incredibly low by historical standards, but companies – and governments – have become accustomed to incredibly cheap debt. Companies will need to factor this change into their capital plans – along with other elements of uncertainty. We’ve said before here that companies have – to a point – ploughed on because uncertainty is now the norm and they cannot afford to standstill.  But, if there is less international co-operation, more restrictions on free movement of goods, services, capital and people and greater uncertainty about currency, tax and regulation – in deals and operations – it might give more companies reason to pause in deals and investments.

Ifs, buts and maybes…

Then again, if we’ve learnt nothing in the last few years it is that companies and markets can defy all of our expectations. So, perhaps what it really comes down to is the ability to be prepared for likely impacts – but also have the flexibility to adapt quickly if it all fips again. Companies will need to be able to flex their plans and think imaginatively about how they access markets. It’s been interesting to see recently how companies are increasingly looking alliances to form less formal more flexible arrangements. I suspect we’ll see more of that kind of deal as companies look for an edge in fast moving, unpredictable markets.