Five of the world’s 10 biggest economies are run by populists. In the other five, populists represent a strong opposition.
This might seem like a new situation, but, in fact, it isn’t. Populists have been around throughout the ages, and they return to power under the same conditions.
The fundamental idea behind populism is the defense of the underprivileged, the working class, against the investing class, the wealthy, the elite.
This idea re-emerges with force after or during a time of crisis. In times of prosperity, the two groups get along. When everyone is making enough money to live comfortably according to his ideas of comfort, no problem.
When the wealth gap widens, this dynamic shifts.
In the last 100 years, wealth gaps have widened substantially twice—first in the era leading up to the Second World War and then again recently after the 2008 global financial crisis. Both times the disparity led to the rise of populism. In the first half of the 20th century, this led to war.
The main reason wealth gaps widen is the availability of cheap credit. When it is easy to borrow money, a lot of it gets pumped into the system, creating asset bubbles. Because the rich hold more assets to begin with, their wealth increases more than that of the working class, widening the gap.
After the last crisis, near-zero interest rates in the United States and zero interest rates in the EU created huge stock and real estate bubbles. Naturally, those who held more of these assets from the start benefited the most, widening wealth gaps around the world… and creating a climate ripe for the return of the populists.
Populists play to envy, one of the most powerful human emotions. If you’re a member of the working class watching the elite grow wealthier while you stagnate, you become envious… even angry. When someone in a position of authority promises to change the situation and to return power to the hands of you and your struggling brethren, you’re in.
The candidate can come from either side of the political spectrum, the left or the right. In the last U.S. presidential elections, for example, we had Donald Trump representing right-wing populism and Bernie Sanders representing left-wing populism. The fact that these were two prime candidates for president of the most powerful country in the world shows that we are deep into a populist period.
What’s more worrying is that today we have populist leaders in most of the world’s major economies—Xi in China, Modi in India, Conte in Italy, Bolsonaro in Brazil, Obrador in Mexico, and I could go on.
We don’t know yet if this period of populism will lead to a military war, but it has already led to a trade war. Alongside the elite, populists like to portray foreign countries as the reason for domestic troubles and to tout protectionism and tariffs as the solution. This approach is incredibly shortsighted because international relations take years and decades to rebuild.
The shortsightedness of the populists’ approach is also apparent in the way they view fiscal policy. It is aggressive and focused on growing the domestic economy no matter the future costs. The tactic is usually successful in the short term. Tax cuts and infrastructure spending boost the local economy, leading to lower unemployment, greater disposable income, and higher expenditures. Companies focused on the domestic market benefit the most, while multinationals suffer from this protectionist approach.
If you look at the period of February through August in the United States this year, you see that the Russell 2000, an index comprised of small-cap stocks active on the domestic market, significantly outperformed the Dow Jones, which instead includes large-caps focused on the international market.
President Trump is now promoting an infrastructure bill as well as a tax cut 2.0, meaning the window to profit from this situation should continue.
The problem is that U.S. stocks are massively overvalued. Valuation multiples are off the charts.
That is why this is the time to be shifting your focus abroad. The same situation we have watched develop in the United States is now beginning to play out in emerging nations across Latin America, Southeast Asia, and Sub-Saharan Africa. Many of these fast-growing economies have stocks immune to the continuing global trade wars because they focus purely on their respective domestic markets.
What’s more, they are trading at far better valuation multiples than their North American counterparts.
My best specific recommendations are detailed in the recently revised “Seven Emerging Market Stocks You Can Get For Pennies On The Dollar.” Go here for more information on these current opportunities.