July 18, 2016
Stig Zarle, Senior Securities Analyst
The process of globalization, long a source of controversy, is facing increased skepticism from new sides. While globalization has helped to fuel part of the economic growth of the post-World War II era, increased international trade and investment has been questioned by thoughtful, constructive voices that point to legitimate problems with the extension of corporate power without offsetting protections for national sovereignty, labor, and the environment. Recently, however, support for “de-globalization” has found a source of new momentum in the form of markedly-different, less-than-constructive nationalist groups and their anti-immigration platforms. This phenomenon is front-and-center in the United Kingdom (UK) at the moment, as voters will cast ballots on Thursday, June 23rd in a referendum regarding their membership in the European Union (EU). UK voters will decide between remaining in the EU and continuing to participate in the free flow of goods and people across borders, or ending their association with the 28-member entity and choosing a new path built on the idea of self-determination. Regardless of the outcome of the UK referendum, growing support for protectionist, nationalist ideologies is fueling a broader reconsideration of globalization.
As the UK ponders its future in the EU, other countries are witnessing a stronger embrace of anti-immigrant, isolationist-leaning philosophies by their citizens. Recent elections in Austria and France underscored just how deeply these conservative nationalist platforms have resonated with the electorate. Germany’s AFD and the Dutch Party for Freedom in the Netherlands have also made considerable inroads into voter psyches with their anti-immigrant, protectionist messages. But the steady rise of nationalism is not confined to Europe. Here in the US, presidential candidate Donald Trump has used his promise of building a wall on the US/Mexico border, among other things, as a symbol of his support of economic nationalism.
While underwhelming economic growth has likely contributed to the recent acceleration in protectionist rhetoric, immigration has been made the primary scapegoat. Middle– and lower-income voters who feel left behind in this age of globalized markets have been especially sympathetic to these anti-immigrant messages. In reality, tepid post-Recession growth (where real GDP growth from 2010–2015 has averaged 1.2% and 2.1% in the EU and US respectively) has been hindered by a variety of factors including a slowing Chinese economy, a depressed labor market, and widespread commodity price deflation.
The current positioning of our portfolios is based on an outlook that assumes slow global economic growth. Notwithstanding many years of low interest rates in almost every region of the world, global economic growth remains anemic, at least by historical standards. For reasons we outlined in our previous memo we expect this slow global economic growth to continue. In light of that, stock markets look fully valued and vulnerable to sell-offs, as we saw last summer and earlier this year. We currently hold significant amounts of cash in most portfolios with very little direct exposure to the UK. Even if the UK votes to stay in the EU a likely relief rally may be short lived as investors reflect on the global trends that led to this referendum.