Before anyone was talking about pandemics or lockdowns, the world was already seeing a notable rise in populism globally. A less capitalist society could mean lower profit margins for corporates while funding required for government programs could spur changes to corporate and individual tax policy. Given the surge in unemployment, we expect more populist stances to gain traction in western economies. Increasing infrastructure spending and boosting consumer spending could help propel hiring programs and job creation, but could also increase inflation as governments raise trade barriers to protect their local workforce and industry.
From an equity market standpoint, refocusing on domestic-focused industries vs. globally-oriented businesses could prove an opportunity for value stocks as the anti-globalization drive negatively affects global industries and promotes domestic ‘national’ champions. Pressure on stock buybacks could mean the end of a ‘just buy the market’ mentality and usher in a new period emphasizing the importance of stock selection and dividends in the search for positive returns.
Currently, U.S. equity markets are pricing in an earnings rebound but with concerns over falling profit margins as a result of the downturn, expectations for medium-term earnings growth might be optimistic. And rising geopolitical pressure could also dampen earnings growth prospects. Getting 30 million new jobs created quickly enough to generate powerful consumption trends could also take longer than expected.
Authors: Tobias M Levkovich,