European markets appear volatile. How will Brexit affect volatility?
Well, Brexit has been a real journey so far. We’ve seen more than two years of that since our vote to leave the EU and at the moment nothing has really happened. But this is now all building to a crescendo of course, and a lot of this will be resolved in the course of the coming weeks and next couple of months. Ultimately, we think that Brexit is very difficult to deliver. Within Brexit, we think we’re heading towards a messy divorce because intrinsically, the UK cannot have what it wants and the EU is not incented to actually let the UK have its cake and eat it. They don’t want to do something that encourages others to actually leave this community and therefore we feel that Theresa May, in trying to deliver an agreement with the EU, is really struggling to reconcile with the position even within her own conservative party and this could mean that the risks in the course of the weeks to come see us veering towards more of a danger of a hard Brexit, a falling out without a deal if legislation cannot be successfully passed. And it could be that the UK collectively needs to look over the edge of the cliff in terms of what this hard Brexit could look like before, at some point, maybe later on from now, we end up with a political break occurring and this could mean another election. It could mean another referendum. It could mean Brexit being delayed or deferred for a time. We’re not quite sure just yet. But one of the things that we can observe is that for many, the whole topic of Brexit has become dull and boring because nothing has happened since the vote in 2016 but actually all of the volatility and opportunity is right ahead of us and is there to play for. We can see scope. There are some big moves in UK asset prices. Depending on the outcome, for example, of a general election, an election where a Labour government under Jeremy Corbyn could win, could easily see a situation where bond yields would be much, much higher in the UK going forward than they currently are today.
Populism is driving many political trends around the world. How will this affect global financial markets going forward?
Populism has really been a defining and important trend in recent years and I think at the heart of this move toward populism in politics is the fact that median incomes for a lot of individuals have stagnated. People are no better off today than they were ten or fifteen years ago and this frustration has led voters to alternative outcomes. What I do think we’re seeing within populism is almost a realization that in the recent past, in a period of globalization, a rising share of GDP has been going towards capital and a declining share has been going towards labour. I’d suggest that going forward from here, we could well be in an environment where that labour share needs to grow, wages need to go up, and this could make it more difficult for capital. If there’s more going to labour, there’s less going to capital, and therefore this may create something of a headwind, I think, for corporate earnings on a medium-term view looking forward from here. But higher wages could mean slightly higher inflation, could mean slightly higher interest rates as well. So, when we look at these trends around populism, I do think that they all have important ramifications in financial markets but ultimately and intrinsically, within the whole idea. Populism is about presidents, prime ministers trying to deliver what the populace wants and I think that higher wages is at the heart of this. When you look at topics like immigration, we’re seeing a move away from accepting immigration and maybe a more xenophobic outcome, but at the heart here is the erosion of wages which is leading to these underlying tensions. This also speaks to trade as well and I do think that this moving and globalization is going to see us go somewhat against policies of free trade, with fair trade being more at the heart of the agenda on a forward-looking view. So when I look at a place like China, I do see downside risks, because ultimately, in meeting with US policymakers recently, I’ve really come to understand that there is a desire to actually limit the rise of the Chinese superpower at this point. There’s a desire to stop Chinese hegemonic power and China taking over, and so there may not be a lot that China can actually do to avoid tariffs ultimately being applied to all of its exports. So, understanding these trends, understanding the winners and the losers, creates opportunities both on the short side and the long side and as an active investor if we can be positioned the right way, this is where the alpha opportunity will be.