Economic Crisis

Too much politics is bad for investors: Brazil, the USA and Europe

There’s too much politics about. Brazil can’t work out whether to get rid of its current president.  The USA takes two years just to choose one. Britain may or may not leave the EU in six weeks. A high and rising number of other Europeans want to leave too. With all this political uncertainty, what’s an investor to do?

Early yesterday the interim chief of Brazil’s lower house, Waldir Marahao, annulled last month’s vote to proceed with presidential impeachment proceedings, citing procedural irregularities.

By the middle of the night he had changed his mind, and said the process could continue. The Brazilian senate is due to vote tomorrow on whether to initiate an impeachment trial against president Dilma Rousseff.

Did someone get to him? Were they carrying an attache case full of cash? Or did he just discover new evidence that meant procedures had been followed to the constitutional letter after all? Who knows. But his behaviour was that of a rank amateur, especially when so much is at stake.

Brazilian stocks fell 4% initially, but ended the day down less than 2%. Today they’re up 2% as I write. Panic over, for now.

This episode is a perfect example of why I think it’s still too early to invest in Brazilian stocks. (see: Avoid Brazil and buy Colombia). There’s too much uncertainty and risk, for the time being.

Buying into a country after a crisis is usually a great way to make a lot of money. But Brazil’s political (and economic) crisis is ongoing, and has many months to run. Rousseff is not going down without a fight. Her remaining hard core of followers are taking her lead, and taking to the streets.

Further north, politicians in the USA continue to slug it out over who will be the country’s next president. It’s an interminable marathon that lasts nearly two years. It’s like some kind of appalling Netflix series with no off button.

Consider this. Hillary Clinton announced her candidacy for the Democrat party in April 2015. Donald Trump announced his in June 2015. The election isn’t until 8th November 2016, meaning their campaigns will have run for 19 and 17 months respectively.

Add in a bit of pre-announcement planning and we’re talking about a two year race for the top chair. I don’t know why the US election has to be so drawn out. But I note that other countries get this stuff out of the way much more quickly – usually in a matter of weeks.

Ultimately that leaves people happier. After a quick spurt they can leave heated political debate behind and concentrate on the things that really matter. Like how their kids are doing in school, or what to have for dinner.

Clinton and Trump are now the front runners for their parties, even if they (still) haven’t been officially nominated. Whatever your views of each of them, it seems that both are deeply disliked by their opponents. Whoever is eventually the first to stagger across the finish line, almost half the country will be deeply dissatisfied.

I do my best to avoid the daily news about the US presidential race. I consistently fail in my quest. As always, it’s media saturation on a global scale. Two years on. Two years off.

I don’t write about it much either. What could I possibly add, when there are so many tens of thousands of rabid news hounds and vapid talking heads already on the case?

In the end, Americans will vote and choose a new person to occupy the throne in the oval office. Life will go on, for better or for worse.

In the end, Americans will vote and choose a new person to occupy the throne in the oval office. Life will go on, for better or for worse.

You never know, the US political establishment – politicians, activists, lobbyists, oligarchs – may even get around to doing something other than campaigning. As I said, life will go on, for better…or for worse…

Across the North Atlantic there’s another vote coming up that’s potentially far more important. This is the British referendum on membership of the European Union, which takes place on 23rd June.

Why do I say it’s more important than the US presidential election? After all, by no measure is the UK a country that’s as important as the USA in world affairs. But this vote – which looks set to be an extremely close run thing – is about much more than Britain itself.

This is because it has the potential to turn the EU on its head. That matters because the EU presides over 508 million people. Britain is the second largest economy in the EU, after Germany. What’s more, it’s not just in Britain where substantial numbers of people are fed up with the whole thing.

A new poll by Ipsos MORI asked people in eight EU countries – Belgium, Poland, Sweden, Hungary, France, Germany, Italy and Spain – if they thought their country should have its own membership referendum, and how they would vote if it did.

Overall they found that 45% wanted a referendum, which is a very substantial minority. Of those, 33% would vote to leave the EU. That’s a pretty high proportion that have had enough of the unelected bureaucrats in Brussels, even if not enough to take the EU apart.

But two important countries really stood out. Those were France and Italy, the EU’s third and fourth largest economies.

In France, 55% of people surveyed wanted a referendum and 41% said they would vote to leave. In Italy, 58% said they wanted a referendum and 48% said they would vote to leave. If Britain does choose to go I’d expect those figures to go up, as the “leavers” are emboldened.

This is France and Italy we’re talking about! They were two of the five founding members of the original European Coal and Steel Community, set up in 1951 and a precursor to today’s European Union.

After various iterations, the actual European Union of today – with its explicit mission of political integration and the creation of a federal superstate – wasn’t created until 1993. Following massive expansion into Eastern Europe – including 10 additions in 2004 alone – the EU empire has now grown to include 28 countries.

France and Italy were there right from the start. Yet practically half of their populations – if the poll is even vaguely accurate – have had enough of the EU. It’s not just those difficult British that are equivocating.

Consider this. The next French presidential election has first round voting in just 11 months time. The polls consistently indicate that Marine Le Pen, the leader of the nationalist Front National party, has 30% support. That puts her in either first or second place, depending who runs against her.

This a big deal. The Front National has a history of overt racism and anti-semitism – under Jean Marie Le Pen, Marine’s father – even if it claims that those days are behind it.

Le Pen wants to take France out of the euro and throw up trade barriers to protect French industry. If that happened then, effectively, the EU project would be dead in the water.

Le Pen wants to take France out of the euro and throw up trade barriers to protect French industry. If that happened then, effectively, the EU project would be dead in the water. As I’ve said before, the EU is rotting from within.

We don’t know what’s going to happen in Brazil, the USA, Britain or the rest of the EU. But there’s certainly too much political uncertainty in all those places for my taste. And the tone is increasingly confrontational and populist, which never turns out to be a good thing.

This is bad for investors. There is already enough uncertainty in investment decisions without erratic politicians running rampage.

But there’s a solution, of sorts. As always, only buy things that are cheap, which means they bake in the risk. And get some shiny insurance too.

That way you have a much better chance – but never a guarantee – of coming out smiling…whichever politicians are in power.

Keep it simple in an already complex world.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.