Time to take off the blinkers

Category: Asia, Global

If you turn your eyes away from the political headlines to where asset allocators normally look – the business and financial news – you could be forgiven for thinking that we’re now living in the best of times. Yes, there are signs that the “Trump bounce” is running out of… well, bounce, with stock sell-offs in Europe. All the same, there seems to be a remarkable bounceback from the risk-aware hesitancy of previous years, which helped to drive the “new normal” of highly correlated asset classes and markets moving in step with policymakers’ pronouncements. Investors and institutions that acted and allocated as though in fear of some fresh market crisis and new systemic breakdown are now behaving as though the macro environment is back to pre-2008 days. And all thanks to outbreaks of political stupidity? What is wrong with this picture?

Admittedly, the drop-off in the quantitative easing and austerity policies that helped drive the “new normal” are a lot to do with that. But it’s concerning that geopolitical risk is not being priced into the market anywhere near as much as it should be. Brexit is a demonstration that human beings, in defiance of most economic theories, are not rational actors pursuing their own self-interest: they may be the exact opposite.

Remember that, according to dictionary definitions, demagogues rise “by exploiting prejudice and ignorance among the common people, whipping up the passions of the crowd and shutting down reasoned debate”. That doesn’t sound like any kind of environment for good policy-making. And the blind optimism of investors who piled into equities on the basis that a Trump presidency would be pro-business and commercially good for America may be rudely disappointed. Any pro-business leanings of the current Conservative government in the UK, for instance, are totally outweighed by the catastrophic damage that Brexit stands to inflict on the broader economy. And one other alarming characteristic unites both sides of the Atlantic: the blind indifference to facts and rational decision-making when there are populist prejudices to exploit.

In these circumstances, it would be advisable for asset allocators to hedge against extreme macro shocks and any number of black swans falling from the skies. Oh, and perhaps live up to their own rhetoric about corporate social responsibility and being responsible corporate citizens, and start making the case for socially inclusive, globally-oriented, open-minded, rational policy-making in general. Because if they don’t, the politicians don’t look about to – with all kinds of consequences for pensioners and other stakeholders for whom asset allocators have fiduciary responsibility. That’s one more kind of responsibility than many leaders appear to have right now. Be prepared for more disastrous self-harm.