Why the anger and what does it mean for markets? Illustration / Rod Emmerson
Why the anger and what does it mean for markets? Illustration / Rod Emmerson
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
From Britain, to the US to Australia, voters are punishing politicians. Why the anger and what does it mean for markets? asks Liam Dann
Even after the shock result, financial markets could have shrugged off the Brexit vote, says Greg Peacock, chief investment officer for investment fund NZAM.
But despite what the stock exchange numbers might suggest, they haven't. Instead, there is growing unease about what happens next as a new wave of political volatility spreads across the Western world.
"So the financial market impact lasted two days," says Peacock. "If you look at it on a standalone basis, the UK is 4 or 5 per cent of global GDP; if it slows down or even goes into recession there is a bit of 'so what' about that."
But the significance of Brexit and the fears it is creating "are really what it implies about future events". The UK is in turmoil, Australia is in turmoil. Who is next? Donald Trump and the US elections are looming large. Then there is Italy, where Prime Minister Matteo Renzi has offered angry voters the chance to chuck him out with a referendum on political reform in October. And what about New Zealand - could we follow the trend?
"What we are seeing is a push back against, some would say, the whole post-World War II movement - globalisation and free trade," Peacock says.
"The global financial system just feels extended here. You've got negative bond yields. High multiples on equities. It's become kind of self-fulfilling in the sense that whenever there is a crisis the reaction is to cut rates and pump QE."
The beneficiaries of those polices have been people with assets.
"Bonds, equities and property. They've done better than anyone could possibly have imagined but there is a very large proportion of people in those economies who simply feel like they have been passed by," says Peacock.
Mark Lister, head of research at Craigs Investment Partners, says "the Brexit was a wake-up call for politicians and investors and I think we'll see plenty more of it.
"It's simply a reflection of the fact so many people feel like they are missing out on their share of the boom."
We're used to hearing this kind of thing from left-wing commentators and politicians. But neither Peacock nor Lister has a political axe to grind. Their analysis is matter-of-fact and born of concerns for investors.
Watch: The Economy Hub: The rise of 'up-yours' voters:
"The low interest rate thing hasn't really fired up economies or seen any wage growth come through," Lister says. "All we've done is make house prices and share prices go up. The wealthy end of town feel wealthier, the bottom end and the middle end haven't really benefited at all and people are just getting sick of it and are feeling very disenfranchised."
Auckland University professor of macroeconomics Prasanna Gai has worked for the Bank of England, Bank of Canada and advised our Reserve Bank. Nearly 10 years on from the global financial crisis we are still suffering the fallout, he says. And there are echoes of the 1930s.
We have allowed central banks to "shoulder all the burden" and politicians' failure to confront the big structural issues may be coming back to bite them.
"You've got a confluence of three factors," he says. "Firstly, productivity growth everywhere is unusually low. That's a consequence of a misallocation of resources in the boom which preceded the global financial crisis."
Then there is debt.
"Global debt levels are at historically high levels ... because debt has served as a substitute for income growth pretty much everywhere." Then you have the central banks with very little room left to move and "a substantial rise in economic uncertainty as well as policy uncertainty."
[Brexit] is simply a reflection of the fact so many people feel like they are missing out on their share of the boom.
What we are seeing is "protectionist discontent", he says.
In other words, people are looking for political leaders who promise to put their local interests first even if that might not be in their greater long-term interests.
"It is no accident," Gai says. "If you think back to history and the Great Depression, financial crises and protectionism go hand and hand. All these events, whether it's Brexit or Australia or the US, kind of have a very similar theme.
"The central banks prevented a catastrophe [after the GFC] and everyone banked on an eventual recovery. But politicians have underestimated the consequences and the duration of a financial cycle gone wrong ... and they have not self-corrected along the way.
"There is a strong case for other policy measures to take a leading role. So structural policy, fiscal policy - for example, tax reforms that get the bias away from the accumulation of debt - incentives that spur productivity and dynamism. Structural reforms that target these issues will help."
"Remain" supporters rally in response to Britain's Brexit vote. Photo / AP
There is a sense, then, that it has all just taken too long. Ironically, just as the US Federal Reserve was starting to hike rates, the public has lost patience and rebelled - potentially creating a new crisis.
"There is a risk that such a dynamic can become self-fulfilling, and be difficult to shake," says Prai.
There is a "scarring effect" on households and business and they are all holding off on investment decisions.
"During the GFC you had a lot of economic uncertainty, this is now being exacerbated by policy uncertainty because we don't know what the governments are going to do ... or even who's going to be the Prime Minister or what their policies are going to be."
From a market point of view that's problematic, Lister says.
"It's hard enough trying to pick economic outcomes, but to try and pick political outcomes, that's even more difficult again." For markets it means more ups and downs and more sharp reactions - both positive and negative - for an extended period, he says.
Trump may be a warmonger but even if he went back to war in the Middle East, it's not going to create another recession.
"It is really hard to see what the circuit breaker would be."
Mike Taylor, chief executive of fund manager Pie Funds, takes a more optimistic view of the turmoil.
These events can create a lot of noise but don't spell doom for markets, he argues.
Economic uncertainty has a much larger effect on markets than political uncertainty.
"We saw that at the start of the year when fears of a US recession pushed global markets down 15 to 20 per cent. The Brexit effect has been mild by comparison."
It is important not to overplay the connections between events, he argues.
For example, there is a banking crisis looming in Italy, he says.
"Investors have to be careful not to say: the Italian banks are in trouble because of Brexit, because that's not true."
