Looking to the politicians, ‘Perspectives’, June-July 2017

With the election of Emmanuel Macron as French president, the tide of populism may have been stemmed for the moment in western Europe. Has Europe’s political class found the formula for dealing with the phenomenon? “I wouldn’t bet my investment career on it,” answers Pictet Wealth Management’s (PWM) chief investment manager, Cesar Perez Ruiz, in the June-July issue of ‘Perspectives’. Signs of ‘peak populism’ should allow investors to focus on the improving growth environment—but none of the factors that gave rise to the populist explosion have gone away. “The next turn in the economic cycle could well tip the balance in a number of countries,” writes Perez Ruiz.

The theme of the interaction between economics and politics is taken up PWM’s chief strategist, Christophe Donay. Having doused the flames of the financial crisis, central banks have begun to step away from expansionary monetary policies, which means, writes Donay, “there is now the tantalising possibility that economic policy will fill the void”. Donay argues that once the sugar rush provided by positive earnings surprises fades, “a further leg-up in risk assets may depend increasingly on fiscal and budgetary policy” and its success in putting the current cyclical recovery on a firmer footing.

But Europe is not the only place where the markets remain intently focused on politicians. Along with his constant wrangles with the media and the security establishment, president Trump’s promise to replace Obamacare is still a long way from being fulfilled. PWM healthcare analyst Adrien Brossard believes the saga of healthcare reform is actually “fairly uneventful for healthcare stocks…but a touch more important as a proxy for Trump’s ability to deliver fiscal reform.”

And this year’s most important political event in China looms: the 19th Party Congress, to be held in the fourth quarter. According to PWM’s senior Asia economist Dong Chen, the congress will see considerable changes in the ranks of Chinese leadership, and will probably result in the consolidation of the power of party general secretary and Chinese president Xi Jinping. In Chen’s view, the way could then be open for an acceleration in structural reform, more serious efforts to tackle high levels of indebtedness and “more leeway…in terms of growth targets”. The result could be a slowdown in growth over the short term but, according to Chen, “failure to act would cost China a lot more in the long term.”