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Investment Commentary

photoJuly 18, 2016

A Ref­er­en­dum on Globalization?

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 20102015 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.

Mr. Zarle ana­lyzes the finan­cial state­ments and com­pet­i­tive posi­tion­ing of pub­lic com­pa­nies in his role as a secu­ri­ties ana­lyst at Zevin. As a mem­ber of the Invest­ment Com­mit­tee, he per­forms fun­da­men­tal equity research across mul­ti­ple global sec­tors to sup­port invest­ment deci­sions for client port­fo­lios. Pre­vi­ously he worked as an equity ana­lyst for Pyra­mis Global Advi­sors (a divi­sion of Fidelity Invest­ments) and Pio­neer Invest­ments. Stig holds an MBA from The Uni­ver­sity of Chicago’s Booth School of Busi­ness and a BA in Eco­nom­ics from Bates College.