Popular politics and a move away from free trade are the biggest risks facing investors, according to fund managers.
The big issues are Britain leaving the European Union and world leaders changing in crucial elections in the US, France and Italy during the next year.
These political changes could result in protectionism and trade barriers isolating economies from the rest of the world, warns asset allocation strategist Edward Smith of international wealth manager Rathbones.
In the report Trade of the Century: Popular politics and the hidden costs of protectionism – why investors should take note, he argues that while protectionism pleases businesses and voters, the real result is inflation rises as output and GDP growth stall.
The likely consequence is investors suffer as business profits decline, explained Smith.
The points he makes in the report are:
- Protectionism is a short term fix and does not work in the long term
- The US is at particular risk of protectionism if Donald Trump wins the White House in November’s presidential election
- Trade wars between Britain and Europe or Japan and her Asian neighbours are huge risks for investors
- The risk from protectionism is low, but could change quickly after a spate of important elections
Smith goes on to argue that free trade is in the best interests of consumers and investors.
“Politicians often declare that protectionism saves jobs, which is misleading,” he said.
“The impact of trade on the work force is negligible.
“Trade, however, encourages competition, which provides the incentive to improve productivity. Of course, not everyone wins. While in the long run higher productivity reallocates rather than destroys jobs, the interim upheaval can have a significant impact on the distribution of wages and income.”
In his report, Smith describes how President Obama raising tariffs on Chinese tyre imports between 2009 and 2011 appeared to save more than a thousand jobs, but the policy cost consumers $1.1 billion a year.
“Free trade and globalisation have helped lift billions out of poverty, while productivity has soared. But the last 30 years have also left many behind,” said Smith.
“If politicians wish to secure the benefits of trade for future generations they would do well to implement policies that soften the disruption and diffuse the more immediate spoils, else the nationalistic demagoguery of maverick politicians could deliver shock results to politicians and investors alike.”