Emmanuel Macron's election as French President won't be enough to stem the tide of populist sentiment in Europe and its effects on European markets, according to William Blair dynamic allocation strategies portfolio manager Thomas Clarke.
Speaking at a media briefing in Sydney, Clarke said global markets are currently dominated by several macro trends: central bank intervention is precluding normal market asset pricing, the fading commodity super cycle, a turnaround in Chinese growth and the growing global anti-establishment movement.
"Populism is in everybody's lexicon now - it's mainstream. We first started integrating it into our investment decisions in February of 2010, when we saw the Tea Party emerge during the Obama administration. And despite what happened in France recently, it isn't going away: geopolitical and macro risks arising out of populism will continue for some time," he said.
"The only thing that will see that macro theme off is a few years of robust, inclusive strong growth across the world. Things are bit better this year than in 2016, but it's still coming from a low base. We're not there yet."
Clarke noted that most investors agree populism will remain an important part of investment decisions, but "most people don't know what to do about it."
"For what it's worth, the way we form our analysis around it is we see scenarios like the rise of populism as what we call game theatres. It's a multiplayer negotiating exercise, where you have several players, competing constituencies, and differing objectives," he said.
"But where geopolitics differs from markets is that each player has a mutual incentive to deliberately increase risk and create uncertainty that otherwise wouldn't exist. They want to issue bluffs and warnings about the consequences of letting the other side win. Basically, they want to agitate and rattle the cage and generate the exact kind of uncertainty markets hate and run away from."
A perfect example of this, he added, was the Brexit vote last year: "In a scenario like that, it helps you to determine whether that uncertainty will help a particular price move towards fundamental value, whether down or up. That can be really useful. Instead of saying, 'I need to get out of exposure here,' you can say, 'I can take a more aggressive view if I can see this geopolitical event triggering a move towards fundamental value.'"