12 Jun 2020 3 min read

Beware a political malaise

By Emiel van den Heiligenberg

We may be dealing with the repercussions of the coronavirus for many years after the economic lockdown is lifted.


Image of typhoon

The near-term implications of the coronavirus outbreak and ensuing global recession are still so uncertain that it is tempting to focus solely on the outlook for the rest of the year rather than the rest of the decade.

But as long-term investors, we know it is more important to understand the direction of the market than its daily or monthly movements. So what comes after the recovery? I believe that this crisis will not so much transform the world as accelerate the trends that were already reshaping it.

We have been discussing a new political paradigm since 2016, the year of the Brexit referendum and Donald Trump’s election. At the dawn of this populist era, I highlighted an academic paper by Funke, Schularick and Trebesch that found that, after a financial crisis, voters seem more attracted to extreme right-wing ideas and rhetoric.

Seeing a market crash occur alongside a pandemic, I also recommend the very topical but similarly depressing research of Kristian Blickle at the New York Fed, who has documented a positive correlation between deaths from the Spanish flu and the Nazi party’s share of the vote in German municipalities during the 1930s.

We very much hope never to see such extremism again – and perhaps furlough schemes have averted the worst political consequences of mass unemployment – but we cannot overlook the gains now being made in polls by far-right parties like Brothers of Italy.

Importantly, such politicians do not necessarily have to win power to matter to investors; they just need to move the Overton window of policies that are acceptable to electorates. For example, just the threat of rising populism in Europe could prevent much-needed progress from being made on debt mutualisation in the single-currency area.

Equally, mainstream parties could become hooked on the greater fiscal spending integral to the COVID-19 response, as politicians attempt to buy support and central bankers gradually lose their independence. This would be very inflationary over the long term, in our view.

Furthermore, the massive borrowing spree underway will most likely kick-start economies. But it could in the longer term lead to a “balance-sheet recession” like the one suffered in Japan, as a subsequent focus on paying down debt hampers growth. State intervention also generally lowers productivity and encourages the misallocation of capital, supressing trend economic growth and average real returns.

From crisis, opportunity

It therefore feels like we are not so much near the end of the present COVID-19 crisis, as at the beginning of an exceptionally tumultuous period in global markets and geopolitics. But as investors we must nevertheless look for opportunities as well as threats, and I have no doubt that the upheaval will present plenty of both.

For example, a balance-sheet recession would typically be associated with a trend towards less corporate leverage and lower pay-outs. This should be positive for credit, assuming the wave of defaults and downgrades is fairly priced.

In equities, we believe we are entering an environment in which technology will be seen as a strategic industry and where its growth, pricing power, cashflows, automation and limited supply-chain complexity will come at a premium.

Our longstanding approach of “prepare, don’t predict” is likely to prove more valuable than ever as we contend with these forces shaping the world for better and worse.

To read our new CIO Outlook in full, please click here.

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg