From Occupy Wall Street and the Arab Spring to surprising victories for Brexit and Trump, citizens around the globe are pushing back against their leaders’ policy choices.
Positioning For Uncertainty
For companies, the potential costs of ignoring the backlash against globalization are already evident. “Brexit has highlighted the importance of being aware of the risks of populism and protectionism,” says Cook at World First. “Companies face significantly higher costs because of the [20%] devaluation of sterling and, in the future, could suffer from additional tariffs and bureaucracy associated with trade.”
Cook says that it is imperative that companies take action to assess and mitigate these risks. “Regardless of their sophistication, companies can prepare for the risks created by this environment by looking at their budgets and hedging risks, including FX, interest rate and credit risk, where appropriate,” he says. “Hedging allow companies to budget more accurately in times of volatility so they can get on with running their business.” Colonial First State’s Halmarick adds that businesses need to recognize that the world is unlikely to go back to the way it was before: “This is all part of the ‘new normal.’”
In the longer term, the mood that has turned against globalization means that yet more money will stay on companies’ books, accelerating a trend prevalent since the financial crisis and slowing growth, according to Cook. “Corporates are not willing to invest because they are preparing for a rainy day—statistically, a US recession occurs every eight years and [so one] is due in 2017,” he says. “Protectionism raises the risk of a rainy day and will result in greater caution.” Sankaran at Eurasia adds that “there may be greater political and regulatory pressure on companies to localize production,” which could force a reconsideration of operational structures.
Trump’s acceptance address was notably more measured than his stump speeches. He called for “partnership, not conflict” with other nations. The hope is that he will prove pragmatic in office and prioritize a traditional Republican agenda of regulation and tax reform rather than his campaign promises on trade and immigration, says Stefan Kreuzkamp, chief investment officer at Deutsche Asset Management. However, the danger that free trade could be undermined and globalization may lose momentum remains very real.
“If we move in a more protectionist direction, consumers will suffer from higher prices, which will slow spending and growth,” says Kalish at Deloitte. “Retaliatory measures would hit exports and employment. In the long term, there would be negative impacts on emerging markets, which currently benefit from cross-border transfers of knowledge.” A worst-case scenario is the introduction of significant tariff barriers between China and the US, which “would result in mutually assured destruction,” according to Cook. “The hope is that the situation will remain like the Cold War, with cool heads prevailing and occasional skirmishes around the peripheries. But there is clearly a risk that this Cold War heats up.”