Although many Europeans have looked at Brexit as a ‘special case’, the disenchantment underlying the populist movement is a Europe-wide issue that cannot continue to be ignored without dire long-term consequences. According to MSCI, unemployment rates in Italy and France, for example, have exceeded the OECD average, and more than 40% of people aged between 15 and 24 are unemployed in Italy (and Spain).
LIKELY PATHS FOR POPULISM
MSCI evaluated two possible scenarios for populism: Brexit with contagion; and the rise of populism in the US and Europe. In the first, Brexit fuels a wave of populism on the continent that leads to the disintegration of the eurozone.
Under their analysis, such a scenario would carry a heavy cost for investors with real GDP growth of -4.3% in the UK, a 22.4% fall in equity markets, and a 10-year sovereign bond yield of -65bps.
Similarly, Europe would see -3.8% GDP growth, an 18% fall in equity markets, a euro sovereign bond yield of -62bps and an Italian 10-year Treasury bond yield of 229bps. The VIX would spike to 100% as a result.
This outcome, according to the analysis, has the potential to lower the value of a diversified, multi-asset class portfolio by 7.6%, with a fall-off in equities of 13.4% and a 1.3% gain in global fixed income.
In the second scenario, which envisions the adoption of populist policies in the US and Europe over the next two years, global growth may fall as much as 3% while inflation surges. The potential impact on the same portfolio could be an 11.1% fall as equities lose 15.6% and yields on a portfolio of fixed income securities fall 4.6%.
While it is still unclear exactly how far the populist arm will reach and what costs that will bring to investors, it is clear that we are still in the early days of this movement and it warrants close attention.
As Bluebay’s Dowding, says: “We are still fairly early in the political cycle towards populism.”
