According to the estimations of asset manager T. Rowe Price, about 40 per cent of the world’s governments are run by populist parties.
For the asset manager’s head of international fixed income, Arif Husain, the economic ramifications of this should be carefully considered and catered for in portfolio construction.
For example, the corporate governance of public companies can be impacted by the mandates of populist governments, which have a tendency to want to produce, manufacture and distribute on home soil, according to Mr Husain.
“If you have big government starting to tell companies where to produce things, then the profit margins start to get eroded. The efficient use of capital starts to change,” he said.
“It probably will end on a global scale with less trade and slower growth as countries start to isolate.
“The trend of globalisation, which is a hugely important driver, is starting to ebb away. Growth is flatlining, and the traditional model is starting to break down,” he said.
Australian investors need to realise that these market forces can lead to higher inflation, more volatility, weaker currencies, and deteriorating bond yields and credit ratings.
“You need liquidity; you need to be dynamic; your strategic asset allocations need to think about what’s coming next, but at the same time, you need to be tactical, because if volatility is here, there is going to be plenty of opportunities to make money,” he said.