Populism is back. Not since the 1930s has the share of the vote for populist parties been so high. From Brexit in the UK to the Lega Nord in Italy to the Gilet Jaunes in France, grass-roots anti-establishment movements are on the rise. According to a study by Exane BNP Paribas, such parties in developed countries enjoy a 40% share of votes today and account for nearly one government in three in Europe today.
Their origins lie in growing income inequality which has seen the average worker's income stagnate while those of the rich advance. In the US, the top 1% currently own 40% of the country's wealth, while the minimum wage - in real terms - has been declining for three decades. The populist playbook calls for income redistribution and greater protectionism.
For corporates, this rising phenomenon is a growing headache, whether it is employee wage pressures, trade tariffs or currency volatility, and senior executives increasingly have to deal with the real-world consequences of this new political landscape. As an investor, selecting businesses whose strategies and business models afford them inbuilt anti-populist safety belts will become increasingly important. High quality companies do a good job of providing such protection.
Consider, for example, the growing pressure from wealth redistribution. For multiple decades now, the share of gross domestic product (GDP) associated with corporate profits has grown at the expense of the share of GDP earned by employees. In response, pressure for corporates to share productivity improvements with employees is now on the rise, starting with minimum wage increases. Last year, Spain pushed through a 22% increase in the minimum wage, following increases in Poland and the UK. Although it is not just populist parties who are legislating for wage increases, they are partly responsible for the trend.
Focusing on companies who already pay enough to avoid the impact of populist redistribution policies is important. High quality companies tend either to employ white collar workers or, where they do engage in blue collar activities (like retailing), they tend to already pay above the minimum wage. This is why Inditex, the Spanish owner of Zara and Massimo Dutti, was able to claim this month that they expect to see no material impact from the latest minimum wage increase in Spain.
A second risk arising from populist movements is economic protectionism in the form of trade tariffs. Quality firms that produce and sell their products within the same market will naturally be more protected from trade barriers than those who centralise their production in (often low cost) countries and ship their products around the world. A company like Lindt, for example, made the strategic decision in 2009 to build production facilities in the US rather than send their products over from Europe. As a result, Lindt is far less exposed to the risk of US trade tariffs than say a supplier of car parts.
Further security from economic protectionism can come in the form of pricing power. The luxury sector, for example, has a long history of offsetting Chinese tariffs with price increases. The price elasticity of a billionaire buying a million-dollar Ferrari is decidedly low and may even be negative. It is not inconceivable that demand for a Ferrari increases as the price increases.
Of course, there are also those businesses that are unlikely to ever be subject to tariffs because they either don't sell goods (software companies) or the goods that they do sell are too critical for governments to risk disrupting, e.g. pharmaceutical drugs.
Finally, let us consider currencies. In recent times, protectionism has resulted in heightened volatility, particularly in emerging markets. Companies with pricing power can look to offset devaluations with local currency price increases, although what is more effective is to simply not price in local currencies at all. Chr Hansen, a Danish supplier of cultures to the cheese and yoghurt industry, uses a euro-based pricing list. This forces customers to pay in euros and removes the need to consider local currencies - something only those who sell the most valued products can do.
Within the global economy, the growing influence of populist movement is presenting many headwinds. In our view, the companies most likely to best weather this storm are high-quality firms who by virtue of the products they sell, the industries they operate in or the strategies they've employed, have developed inbuilt safety mechanisms against the risks associated with populist movements.
Alistair Wittet, analyst and portfolio manager at Comgest