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Investors Debate If the Pitchforks Are Coming

Davos delegates will consider the ramifications of growing gaps between the rich and the poor — a conversation that’s already well underway at fund firms.

  • By Joe McGrath

Global income inequality will be the overarching theme this week at the World Economic Forum’s annual meeting in Davos.

Widespread dissatisfaction with the division of wealth could undermine globalization in the years to come, WEF researchers warned in the organization’s 2018 global risks report, released January 17.

Some asset management firms have likewise identified protectionist trade policies and politics as key long-term threats to investor returns.

BlueBay Asset Management partner Mark Dowding characterized global income inequality as a potentially serious medium- to long-term issue. “Income inequality has been driving more populist outcomes when it comes to politics,” Dowding told Institutional Investor in an interview.

“Although we are in a part of the economic cycle where everything is going a little bit better, when we hit the next downturn, it would be concerning if these issues are not addressed.” Voters, he said, would inevitably look for more radical forms of change in such a situation. “The dialogue I have been having is whether we should adopt a higher inflation target, look at ideas such as universal income, or even raise the minimum wage.”

Richard Turnill, global chief investment strategist at BlackRock, earlier this month warned that the company’s geopolitical risk indicator was at its highest level since March 2015. “Any breakdown in the North America Free Trade Agreement talks would be an ominous sign for global trade, we believe, and hit emerging market stocks in the short term.” Turnill added that investors should “beware” of trade-induced volatility in 2018.

But BlueBay’s Dowding pointed to eased market volatility, suggesting that investors see less geopolitical risk now than they did a year ago.

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“I think it is right to highlight the U.S. policy on trade as the principle threat of a geopolitical nature that is likely to impact on the next few months,” Dowding said. “But, if you end up with the U.S. withdrawing from NAFTA, it might be bad news for Mexico and Canada, but I don’t think it has global ramifications.”

Dowding predicted a much more dangerous situation for markets if the U.S. entered a trade war with China, but thought it unlikely. “Clearly, that is not good for President Trump and the GOP, going into the mid-terms,” he concluded.

In Europe, fund firms have been fairly serene about the forthcoming Italian election. Even if the populist Five Star Movement wins the largest vote share on March 4, one portfolio manager said, he expected little impact on markets.
  
Many members of the asset management elite are slated to speak at the inequality-focused Davos summit, including Blackstone’s Stephen Schwarzman, Carlyle Group’s David Rubenstein, and M&G Investments’ Anne Richards.

The World Economic Forum Annual Meeting takes place from January 23 to 26 in Davos-Klosters, Switzerland.

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