Globalisation, Inequality, Protectionism & the Global Election Cycle

Our latest insights

Globalisation – the exchange of tradable products (both goods and services) ideas, ideals and culture[1] – has been in motion for centuries, even millennia[2].  However, recently we have seen protectionist rhetoric gain traction amongst the voting population, most notably in Europe (including during the Brexit debate) and the US.  The rise in protectionism comes amidst a rise in popularism, as anti-establishment parties and candidates gain share in voters’ hearts and minds.  Indeed, we haven’t seen such anti-establishment sentiment since the early twentieth century, when the electorate turned to the extreme left and right, to the detriment of the political centre.  Protectionism and popularism didn’t work then, and we don’t believe it will work today.

The economic argument for globalisation is one of “comparative advantage”; where country A can produce good ‘x’ less expensively than country B, and country B can produce good ‘y’ more cheaply, then it makes sense for each to specialise in their respective products and trade.  This (theoretically) benefits both economies, as the ultimate consumer pays a lower price for the respective goods and services.[3]

However, the comparative advantage theory doesn’t always work in the real world.  Where an advantage accrues to one country (especially where it is artificially engineered), a disadvantage can often accrue in another.  For example, China devalued its currency in 2005 to a level widely believed to be 37.5% below its fair value[4], which effectively structurally undervalued their economic inputs, most notably labour.  This led many companies in the primary and secondary sectors to outsource jobs to China, in turn leaving many unemployed or forced to re-train.  The chart below highlights the fall in employment in the US in goods-producing industries; from a high in 2000 the number of employed in these industries has fallen by 20%.

The socioeconomic and political consequences of such shifts are significant, and deeply felt.  Most interesting is the correlation between globalisation and inequality.  Thomas Picketty notes in his tome “Capital in the Twenty First Century” that inequality has been rising the world over, with the proportion of wealth accruing to the top 1% increasing since the early 1970s as return on capital has outstripped economic growth[5].

Source: World Wealth Income Database, Waverton

Such a topic naturally fits within the populist rhetoric of both the left (Syriza) and right (Donald Trump) of the political spectrum. The left point to the failure of capitalism and need for more government intervention and control, the right focus on the unfair advantages accruing to other countries, to the detriment of the domestic labour market.  We see rising levels of disaffection the world over as the common denominator behind the rising political risks.  Brexit, European anti-immigration rhetoric and Republican candidate Donald Trump’s success to date all stem – in one way or another – from a disaffected population looking for change.

We believe that protectionism is a poor economic policy, and that it would have the effect of weakening global growth, paradoxically affecting the disaffected voters the most harshly.

So what are we (Waverton) doing about it?

It is becoming increasingly difficult to incorporate geopolitical factors into macro analysis.  Indeed, even the “experts” often fail to anticipate the outcome correctly – political strategists across the globe will attest to this in the wake of Brexit.  Therefore, rather than invest on the basis that a vote falls one way or another, we note that the political environment within which we are investing has changed.  As such, we believe that an additional risk premium needs to be applied to the securities we analyse and invest in, in order to compensate us appropriately for the additional political uncertainty we now face.

While the sands shift, we consider our focus on quality companies with sustainable business models to be a deep-rooted foundation which go some way towards protecting portfolios against potential political turbulence.

By James Mee


[1] Albrow, Martin and Elizabeth King (eds.) (1990). Globalization, Knowledge and Society London

[2] http://www.economist.com/blogs/freeexchange/2013/09/economic-history-1

[3] Comparative Advantage is really an aggregation up of Adam Smith’s “division of labour” which, to paraphrase, highlighted that the subdivision of labour into specialisms enables the proverbial pin factory to increase its output: http://www.econlib.org/library/Smith/smWN1.html

[4] https://en.wikipedia.org/wiki/Renminbi#Purchasing_power_parity

[5] Note, this is not necessarily the case globally, as Emerging Market and Asian economies in particular have seen huge swathes of their populations raised above the poverty line and even into the global “middle class”. However, in the Developed Markets where popularism is gaining traction today, many share the trait of increasing income inequality.

Risk Warnings

The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions.  The information provided does not constitute investment advice and it should not be relied on as such.  All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise.  Capital security is not guaranteed