Beware populism fueled-inflation, warns ETF Securities

Investors should beware of inflationary pressure resulting from populist reforms, warns ETF Securities, provider of Exchange Traded Products (ETPs).

ETF Securities research shows a relationship between Quantitative Easing (QE) and inequality, which it believes will lead to a surge in support for populist policies and a more inflationary environment.

“As inequality issues cannot be reversed overnight, we believe uncertainty is likely to remain elevated at least in the coming year, favouring safer, lower volatility assets. Whilst rising populism doesn’t always end up with the political incumbent losing, some populist policies are typically implemented to assuage the disenfranchised, which are inflationary,” said James Butterfill (pictured), head of Research and Investment Strategy at ETF Securities.

“Investors can protect investment portfolios by gaining exposure to assets which perform well in inflationary or populist environments, such as equities, inflation linked bonds, precious metals and infrastructure,” Butterfill added.

ETFS analysis found that the most commonly-used measures of inequality underestimated the strength of its recent rise and that inequality and QE appear to go hand-in-hand: as a result, a rise of populist policies and leaders, sparked by global concerns over rising inequality, is proving to be a powerful catalyst for reform and policy change.

“Regardless of the success of populism at elections, populist momentum can be a very powerful catalyst for reform, with incumbent parties scrambling to counter the populist wave. The end result is typically a rise in infrastructure spend to stimulate economic growth and social initiatives to combat inequality. Infrastructure spend creates additional demand whilst social initiatives are likely to lead to an increase in consumer spending with the end result being a likely rise in inflation,” Butterfill said.

ETF Securities warns that populist policies in the US, which are likely to include tax cuts, prompting a widening of the budget deficit, could weaken the US dollar in the coming years. Globally, protectionist policies that could constrict international trade and investment are likely to exacerbate global currency volatility, in turn contributing to further investor uncertainty.

The research, published in ETF Securities latest triannual outlook, used a number of measures, including the Palma ratio, a measure of inequality, to show a correlation between deprivation and QE in a number of European countries alongside an increase in significant populist party traction.

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