One of the more significant political trends of the post-financial crisis era has been the shift towards more populist political leaders and parties. But markets have yet to grasp the long-term impact of the rise of populist politics, which could cause challenges for investors in years to come, according to T. Rowe Price’s Nikolaj Schmidt. 
The rise of populism has been characterised more recently by the election of populist governments in Greece and Italy, the UK vote to leave the EU, and the election of Donald Trump as US president on a platform to ‘Make America Great Again’.
Schmidt (pictured), chief international economist at T. Rowe Price, said while markets have reacted to individual events in the short-term, it is unknown what the long-term impact of this shift will be.
He said: “The resurgence of populism has abruptly reshaped global politics over the past few years, but what it means for economic growth and financial assets has yet to become clear.
“The key economic objective of populism is the redistribution of wealth and income from a corrupt elite to virtuous, ‘ordinary’ people.”
To achieve this redistribution across the societal cross-sections, populist political agendas tend to favour loose fiscal programmes combined with policies that directly challenge central bank independence, corporate governance and property rights, the economist said.
This, in turn according to Schmidt, leads to negative market outcomes and problems such as unsustainable fiscal deficits, high inflation and weakened currencies.
He believes that whilst economic growth may initially be supported by these policies, over the long-term markets could suffer from it.
The T. Rowe Price economist said populist movements often bring pressure on central banks to adopt accommodative monetary policies, which increase inflation expectations and bring steeper yield curves, lower real yields, and currency depreciation.
However, a more radical push for income redistribution and high wages can reduce corporate profit margins, which, when combined with greater uncertainty can challenge equity valuations, said Schmidt.
“Both sovereign and corporate credit spreads can be expected to widen when governments undertake fiscal expansion amid a backdrop of limited fiscal space,” he said.
“The early signs of this can be glimpsed in president Trump’s deficit‑financed tax cuts and the ruling Italian populist coalition’s battles with the EU to push through an expansionary budget.”
According to the economist, investors located in countries governed by populist leaders tend to be pushed into inflation-linked bonds, real assets and gold as these typically perform well during periods of uncertainty, which can withstand heighted inflation.
External investors are instead likely to avoid the currencies of populist-ruled countries in favour of more mainstream governments, consequently boosting the currencies of those countries instead.
Yet, the economist said it is unlikely that the current crop of populists will deliver the income redistribution and social mobility demanded by their base.
“Jobs that have been outsourced to other countries cannot easily be repatriated, and excessively loose fiscal policies invariably have outcomes that dent business confidence and reduce capital formation and job creation,” he said.
Schmidt said: “It would be a mistake to think the potential failure of populist politicians will lead to the early demise of populist politics.
“Voter demands for greater equality and social mobility will not be silenced until they have been met – and if the first populist government that is voted into power fails to deliver, voters are more likely to elect another populist candidate than to vote for mainstream candidates.”
As such, Schmidt warned that it would be a mistake to write-off the election of populists adding that they are likely to be “the first in a string of such victories”.
“It is probable, for example that president Trump is only the first of a succession of populist leaders in the US,” he said, adding that further populist victories in south America and Europe are likely.
In addition, the T. Rowe Price economist said that incumbent politicians are likely to shift their stances to counter the threat from populists promising greater equality and mobility.
“To keep populist politicians from power, mainstream parties will find they must offer a viable alternative – that is, centre‑right parties must shift further right, and centre‑left parties must shift further left,” he said.
“In this way, populist movements can exert considerable influence over policy without actually gaining power.”
He concluded: “The path forward is fraught with uncertainty. However, it is important for the markets to embrace the possibility that the populist movement is a long‑term, structural phenomenon – and if it is, I believe it will have long-term, mainly negative, economic outcomes.”