Global equities are on the move

Globally, with unemployment rates extremely low and individual wealth rising from improved house and equity prices, it is surprising that political turbulence is so high. Rapidly changing social policies and/or the increased division of wealth can divide a country politically so much that those who have led the country into a much better level of prosperity can fail to get credit for such. In the case of the US, Obama could not run again and get credit for his economic achievements. Very few would suggest that he would not have won another term, if allowed, even given the division of wealth and progressive social policies. His “coat-tails” did not transfer to Clinton for many reasons not associated with economics and a radical change resulted. Trump is now trying to take credit for the improved economy, but most of this is not due to his own efforts. That said, his intent to reduce regulation and encourage increased domestic manufacturing is making businesses more confident, and despite his unorthodox methods, the US economy continues to move forward at a reasonable pace.

Meanwhile, in Japan, despite all the multifaceted improvements over the past four years, Abe’s approval ratings have dropped significantly, mostly due to non-economic issues. These could easily rebound, however, as he can take credit for these improvements. In Europe, although political stability has improved, this is likely temporary, as the issues of immigration, terrorism, BREXIT and over-regulation will continue to drive political divisions in most countries. Indeed, Macron’s honeymoon will not likely last very long and elections are approaching in Italy and Austria that could easily produce surprising results.

With alternative internet sites dispersing much of the world’s news and the mainstream media becoming less centered, it is understandable that in a mixed society, divisions among voters is accelerating and will not stop unless there is a major threat to the entire country that forces people to rally together out of either hope or fear. There is, however, a chance that the major mainstream media outlets realize the harm that divisiveness is causing and shifts back to the middle, especially as both sides of the political spectrum have much to fear from investigations of impropriety. Mainstream media should also realize that their effort to influence readers’ vision of reality has greatly diminished in the last few years, and, thus, may try to concentrate on the fair and balanced presentation of the facts.
All of this said, equity markets often prosper during times of political discord, as like during the Clinton impeachment; because as long as government is not making trouble with new regulations, businesses usually can proceed, even in a low growth environment, in extracting more profits through pricing methods and improved technology. This certainly has been the case in the US recently, but politics did seem to hold back European equities for a while until recently. This latter fact could be due, however, to the somewhat lower ability of European countries to improve their technology or their lack of pure concentration on profits. As for Japan, equities have been rising right along with the US and Europe, when measured in USD terms, despite the decline in political approval ratings in recent months.

Rising equity prices, however, is no excuse to avoid an effort by society’s main stakeholders to achieve more common ground in political discourse, because there remains a significant chance that dysfunction can turn into chaos, like the potential inability to increase the debt limit in October, in the case of the US. However, for the most part, global investors and corporations should adhere to the model that political spats are no reason to get overly frightened or paralyzed. The odds are very likely that the global economy will continue to move forward, as that is where policymakers’ greatest interests lie.

John Vail is the chief global strategist for the Nikko AM group, covering all major asset classes, chairing its Global Investment Committee and leading the Insights section of its website.