Will populism lose its influence over financial markets?

Populist governments are seeing their support deteriorate, and some, such as Brazilian President Bolsonaro face a tough fight in upcoming elections.

In France, opinion polls suggest that the incumbent Macron will easily see off the more right-wing, populist challengers in the April presidential elections. But it is not just populist challengers that face a tough time. Populist governments are seeing their support deteriorate, and some, such as Bolsonaro in Brazil face a tough fight in upcoming elections.

An interesting study from the University of Cambridge just recently suggests that populists have suffered during the pandemic. Much of this comes down to their handling of the crisis, with perhaps Bolsonaro the best example, although many might put former US President Trump not too far behind. But it is not just that the public seems to have turned on populist leaders; the very ethos of populism seems to have been undone by the pandemic. One finding is that there seems to be more public trust in (non-populist) governments than in democracy, perhaps because many governments have had to use coercive power to ensure compliance with many COVID-related rules.

In contrast, many populist governments have been less strict with their COVID measures but sometimes suffered worse outcomes as a result—which has eroded their popularity. There also seems to be a backlash against the ‘misinformation’ that many populist leaders have allegedly espoused. This alleged culture of being economical with the truth may have helped account for former president Trump’s defeat, and, very soon, similar accusations against British Prime Minister Johnson could see him lose his position as well.

Mr. Steve Barrow, Head of Standard Bank G10 Strategy, said: We may be going back to a ‘kinder’ politics that’s perhaps ‘kinder’ to financial asset prices as well. We only have to look at Turkey right now to see how populist extremes can upend financial market prices dramatically. If the trend is towards the end of such populist leaders, then we might expect financial asset prices to perform better if not too much damage is done in the interim. But besides the prospect of populist leaders being ousted, is there a more global impact in store, even for those countries where populist leaders have not yet taken power or are not close to taking over?

"There is, perhaps, one sense where things could get worse. It relates to the decline in the public’s trust in democracy, which, as we’ve said, may be due to coercive government policies. We are seeing this in Canada right now with truckers’ protesting against mandatory vaccines. Should this sort of public unrest increase, and perhaps migrate to other non-Covid issues, then financial asset prices could fold under the weight of public disobedience. But we think this is a small risk", Mr. Steve Barrow said.

More likely, the decline in populism as an ideology, and the leaders that champion it, will usher in a reduction in policy uncertainty. Many argue that populism took hold after the financial crisis as a backlash, initially against banks and then against the ‘powerful elite’. Data on policy uncertainty does show a notable increase in the post global financial crisis era, rising notably when Trump became president. It spiked again under Covid but has started to ease down, notably. And while it is hard to avoid sweeping generalisations, Mr. Steve Barrow’s view is that declining policy uncertainty is more likely to be beneficial for economies and beneficial for the asset prices that use the economic backdrop as their starting point. This being said, there are still many populists that can still generate significant uncertainty right now, such as PM Erdogan in Turkey and, particularly, President Putin in Russia. Many won’t be quickly ousted by any turning of the global populist tide. Hence, it might only be a case of two cheers for declining populism, not three.