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Populism in Global Politics: What should investors watch out for?

Populism in Global Politics: What should investors watch out for?

Author: Benjamin Lu Jiaxuan, Analyst, Phillip Futures Pte Ltd

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The winds of change have bellowed on global politics as a rising tide of populist leaders have taken office into the 21st century. The economic climate has turned harsher as nationalistic sentiments seep into government policies. Financial markets have struggled with marked volatility amidst Brexit, US trade protectionist policies and the rise of Italy’s anti-establishment government amongst others. The US has also repositioned its foreign policy under the Trump administration with' America First’ as its guiding principle for international trade.

This fundamental shift in political trajectory is in stark contrast with the superpower that helped to found and imbued the values of the World Trade Organization (WTO) for global free markets. The financial markets as such have borne the brunt of rising populism in international politics as markets slammed on a potential blowout on global trade.

What is the impact of nationalism on financial markets?
Chart Source: Bloomberg – CBOE VIX Index & US S&P 500 Index – Weekly Chart

With the Trump administration taking charge in 2016, the US withdrew from the TPP, pulled out from the Paris accord, slapped economic sanctions on Iran, threatened to exit NAFTA and pledged punitive measures on trade partners on the basis of ‘unfair trade practices’. Financial markets experienced marked volatility in 2018 as investors grapple with the Trump administration’s nationalist policies.  

The potential of weaker emerging market growth along with a slower global economy sparked major sell-offs across asset classes as trade tensions escalated in the 1st quarter of 2018. The US has embraced trade protectionism and investor sentiments have been unnerved on fractious diplomatic relations with its global neighbours. As rising populism weigh into global financial flows, how can investors invest amidst volatile market conditions?

Gold: The safe haven asset
gold

The precious metal has a known reputation as a safe haven asset in the financial markets.
It has a tendency to appreciate as geopolitical uncertainties weigh on the markets. Gold prices spiked in the 1st quarter of 2018 as the US begun to escalate trade protectionist measures on its trading partners. Conflict in the Middle East further bolstered safe haven demand as the possibility of foreign military intervention loomed large. Gold as such will have an integral role in the financial markets in 2018 as geopolitical risks, trade protectionist policies and monetary policy tightening weigh into the equation.

Where do we see gold in Q32018?
Though gold prices have weakened substantially into 2018, we remain fundamentally long on the precious metal. Geopolitical uncertainties will reinforce safe haven demand as investors grapple with heightened risks in the financial markets. An inability to conclude NAFTA talks, trade protectionist measures and geopolitical conflicts will create for support levels in gold prices. The resurgence of economic nationalism in global politics will call for volatility in the markets.

Hence, we remain bullish in outlook for the precious metal in 2018. We opined that current pricing weakness seen in gold to be largely temporal as geopolitical risks intensify in the 3rd quarter.  The upcoming US congressional elections in November will bolster safe haven demand as the Trump administration seeks political capital from its electorate with populist measures. Gold prices as such will seek higher ground as 2018 comes to an end. We postulate for a recovery in the precious metal for the coming quarter though headwinds from interest-bearing assets, keep it within range.
Spot Gold XAUUSD: ($1272 – $1365)

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