Whoever wins the White House, there’s a new climate for investors

As the US voted on Tuesday, I watched workmen board up businesses in Manhattan to protect buildings from protesters. Some (the offices of PwC) used plain wooden boards; others (Givenchy) had stylish barriers that projected their logo. One (Theory clothing) even featured cheery flowers on the wood.

All signalled three things: first, business leaders know the political climate is (sadly) creating profound new risks; second, many are braced for this to last; third, a few companies are putting a brave face on it and trying to adapt.

Investors should learn from them. Even if there is a clear outcome to the US presidential election soon, this week’s events are not an outlier — this is the culmination of a zeitgeist shift that has been building for a dozen years. Investors must recognise this, since it will not be reversed whoever next sits in the White House.

Think back to early 2007, just before the financial crisis. It was taken for granted by western business leaders and financiers — or “Davos man” — that globalisation, free-market capitalism, innovation and democracy were self-evidently good things that would only spread and deepen.

No, that did not mean investors accepted the “end of history” idea pioneered by historian Francis Fukuyama. But there was an assumption that the world was moving in one direction. That fostered confidence to plan ahead with a vision of time — and time horizons — as consistent as Newtonian physics.

No longer. Since 2008, faith in all four of those ideas has wilted. Globalisation is the most obvious case in point. As an annual metric compiled by DHL and NYU Stern Business school shows, the global integration of money and goods has slowed, even though the movement of people and information (via the internet) has remained more robust.

And in the case of the US, the White House is almost certainly set to keep embracing America-first policies whoever wins. The only difference is that the version of “patriotism” from the Democrats’ Joe Biden would sound cuddlier than Donald Trump’s, embracing global climate change initiatives and promoting a strategy of localisation tightly enmeshed with pro-union policies.

Free-market capitalism is also in retreat. That is partly because the US Federal Reserve has unleashed so many trillions of dollars of quantitative easing that financial market signals are being distorted. The divergence of equity prices from the real economy this year is one example of this.

But remember, too, that even under Mr Trump, politicians have been willing to provide government aid during Covid-19, be that for households or selected industries, such as coal. Meanwhile, the late 20th-century mantra of shareholder capitalism is on the retreat in the US and European business worlds.

That appals fans of Milton Friedman, the economist who laid out this shareholder mantra 50 years ago. However, Friedman’s acolytes should remember this: shareholder-first ideas were developed in the 1970s, when it was assumed that businesses could rely on the US government to solve societal problems, because the latter seemed competent. This is no longer the case.

Innovation is also contentious. The 2008 crisis made unfettered creativity in finance seem dangerous. This decade has demonstrated the dark side of digital innovation: the internet is eroding privacy, social media is undermining democracy and a winner-take-all digital economy is exacerbating income inequality. Investors should brace for more techlash (which matters, given that Big Tech and communications accounts for 45 per cent of the S&P 500).

Then there is the fourth issue that dominates headlines now: democracy. Thankfully, a Gallup poll suggests around two-thirds of Americans trust the judiciary, a level broadly unchanged in the last decade. But current events might yet undermine that. And even before the election sparked allegations of voter fraud, disenfranchisement and power grabs, only a third of voters told Gallup they trust the legislative branch — sharply down.

All this means the US has been sliding towards what the US military calls “Vuca”: volatility, uncertainty, complexity and ambiguity. This week’s events are a symptom of this, not a cause.

So how should investors respond? First, they should expect asset prices to be volatile. Second, they should remember that time horizons can change — and are now shortening. Third, they should note that it pays to embrace businesses with a “just-in-case” mentality, rather than the “just-in-time” philosophy that dominated the expansion of global supply chains in previous decades.

Last, they must realise that the environmental, social and governance trend, and stakeholder mantra, will remain whoever wins the election. That is not because ESG is a tool of activism; the key issue is that it is also a tool of risk management. In a Vuca world it pays to be resilient, and companies can only do so if they track the “externalities” that used to be excluded from economists’ models — such as income inequality or climate change.

Or to put it another way, investors should take a leaf from the book of those Manhattan store owners: batten down the hatches; accept that uncertainty will last; embrace lateral vision, not tunnel vision. Then adapt with some metaphorical flowers.

gillian.tett@ft.com

Source: Economy - ft.com