Turkey has Recep Tayyip Erdogan. China has Xi Jinping. Russia has Vladimir Putin. Brazil has Jair Bolsonaro. The Philippines has Rodrigo Duterte. Hungary has Viktor Orban. The rise of populism this century has coincided with, and perhaps led to, the return of the strongmen — leaders who, while they differ in important ways, share some common traits: disdain for liberal values, contempt for democratic institutions (such as a free press or independent judiciary), a penchant for nationalist rhetoric and a need for a cult-like worship of themselves.
Even more important than the number of strongmen — and the above is just a partial list — is the geopolitical landscape in which they operate, which has changed, too.
Most remarkably, that’s thanks to the United States, which, despite its foreign policy faults of the past, could largely be relied upon to stand up to foreign leaders’ excesses in word if not always in deed. Yet today, the U.S. president has strongman aspirations of his own, reflected in his fiery rhetoric against the courts, journalists, political opponents and such institutions as the Federal Reserve and the FBI. He has also made it clear that he tends to bond with strong leaders, heaping praise on the likes of Putin, Duterte, Xi and Erdogan, and even on North Korea’s Kim Jong-Un.
So what does this mean for investors, you might ask? Can they find opportunities in all this? It’s true that politicians come and go (or used to), and stable government institutions, the rule of law, dependable regulatory frameworks –– these have long been held to be the more important considerations when deciding where to put your money. But I suspect times have changed.
For one thing, politics clearly has to be on an investor’s mind these days — in large part because the policies of populists are often founded not on a political philosophy but on whatever will reinforce their image or keep them at the top of the media agenda, and that means they can change on a dime. (Consider Trump’s on-again, off-again optimism over a trade truce with China just this week.)
For another, to the extent that the United States is withdrawing from its role as global defender of liberal democracy, its levers for executing that role — economic sanctions and military intervention among them — are likely to become weaker. American moral leadership, meanwhile, has also weakened. So when Trump says, just days before signing into law sanctions against China and Hong Kong over its crackdown on pro-democracy protestors, that “we have to stand with Hong Kong, but I’m also standing with President Xi — he’s a friend of mine,” you might wonder how much teeth those sanctions will end up having.
These developments might matter to investors in a number of ways. For good or ill, we’re looking at little chance of regime change in governments that preside over more than two billion of the world’s people – strongmen tend to like to alter constitutions to see that doesn’t happen. The result might not be stable government, given the populist urges of their leaders, but at least investors are likely to know who’s running things. As well, strongmen may increasingly be operating with more freedom from meaningful economic reprisals from the U.S. For those who have a capital-friendly economic agenda, they might be more likely to have the time and the freedom of action to implement it.
Strongmen tend to like to alter constitutions to see that (they stay in power). The result might not be stable government, but at least investors are likely to know who’s running things.
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Is this dynamic already playing out? Consider Russia, which has been enjoying a renaissance as a destination for foreign capital. That’s in spite of economic sanctions against it, including from Canada, the European Union and the United States. But the sanctions are targeted, generally hitting investment in energy, arms and technology hardest, and foreign capital is finding opportunities elsewhere — in consumer stocks, for instance. The U.S.-dollar-denominated RTS index is up more than 30 per cent on the year. Add to that the fact that the country has a debt-to-GDP ratio of only 20 per cent, a fiscal surplus, a strong foreign reserve position and a national wealth fund of more than US$120 billion, and Putin’s Russia suddenly might look like a relatively alluring place to invest — even with sanctions.
Or consider Brazil, whose recently elected president is undertaking a host of free-market reforms, including overhauling an unsustainable pension system, implementing austerity measures and undercutting job guarantees to its bloated civil service. (Brazilian police are also apparently making good on Bolsonaro’s campaign promise that criminals should be “killed on the streets like cockroaches.”) Brazil is coming out of a long economic doldrum, and free-market reforms might be just what it needs. Investors, anyway, are buying into the potential: the Bovespa index has risen more than 20 per cent year-to-date.
In Turkey, meanwhile, fears of international reprisals over its military operations against the Kurds and purchase of arms from Russia seem to be on the wane. Since Oct. 18, when Trump ordered the withdrawal of troops from northern Syria, the Borsa Istanbul 100 index has risen by about 10 per cent.
Of course, if you look across the full spectrum of market performance in countries ruled by strongmen, the picture is pretty spotty. The Philippine stock index has been pretty flat throughout the year, for instance. China, of course, has been the target of severe U.S. tariffs, and they are no doubt having an impact on the economy — but on investors, perhaps not so much, as Chinese consumers buy more domestically. The Shanghai exchange is up more than 15 per cent on the year.
So what will the rise of strongmen ultimately mean for investors? Like just about everything else political these days, it’s impossible to predict. But it might be something that investors should pay attention to — if they can hold their noses tightly enough.