When the US voted on Tuesday, I watched Manhattan workers set up stores to protect buildings from protesters. Some (PwC’s offices) used simple wooden planks; others (Givenchy) had stylish barriers that projected their logo. One (theory clothing) even showed happy flowers on the wood.
All signaled three things: First, business leaders know that the political climate (unfortunately) creates profound new risks; second, many are prepared for this to be permanent; Third, some companies are brave and try to adapt.
Investors should learn from them. While the US presidential election will soon have a clear outcome, this week’s events are not an outlier – this is the culmination of a zeitgeist shift that has been unfolding for a dozen years. Investors need to realize this as it will not undo who sits next in the White House.
Think back to the beginning of 2007, just before the financial crisis. Western business leaders and financiers – or “Davos-Mann” – took it for granted that globalization, market capitalism, innovation and democracy were naturally good things that would only expand and deepen.
No, that didn’t mean investors accepted historian Francis Fukuyama’s idea of ”end of story”. But there was an assumption that the world was moving in one direction. This fostered the confidence to plan ahead with a vision of time – and time horizons – as consistent as Newtonian physics.
No longer. Since 2008, confidence in all four of these ideas has waned. Globalization is the most obvious example of this. As an annual metric compiled by DHL and NYU Stern Business School shows, the global integration of money and goods has slowed, although the movement of people and information (via the Internet) has remained more robust.
And in the case of the US, the White House will almost certainly continue to follow the policies of the first US, whoever wins. The only difference is that Joe Biden’s version of “patriotism” by the Democrats sounds cozier than Donald Trump’s, which takes global initiatives on climate change and promotes a strategy of localization that is closely tied to pro-union policies.
Free market capitalism is also on the decline. In part, this is because the Federal Reserve has released so many trillions of dollars in quantitative easing that it is distorting financial market signals. The deviation of stock prices from the real economy this year is an example of this.
But also keep in mind that even under Mr Trump, politicians were ready to provide government aid during Covid-19, be it to households or selected industries like coal. Meanwhile, the late 20th century mantra of shareholder capitalism is on the wane in US and European business communities.
This delights fans of Milton Friedman, the economist who created this shareholder mantra 50 years ago. Friedman’s Acolytes, however, should remember this: In the 1970s, ideas for shareholders were developed when it was believed that companies could rely on the US government to solve societal problems, since the latter appeared competent. This is no longer the case.
Innovation is also controversial. The 2008 crisis made unlimited creativity in finance seem dangerous. This decade has exposed the dark side of digital innovation: the internet undermines privacy, social media undermines democracy, and a digital economy that takes into account all winners exacerbates income inequality. Investors should expect more techlash (which is important since big tech and communications make up 45 percent of the S&P 500).
Then there is the fourth issue that is now dominating the headlines: democracy. Fortunately, a Gallup poll suggests that around two-thirds of Americans trust justice, a level that has remained largely unchanged over the past decade. But current events could undermine that. And even before the elections sparked allegations of electoral fraud, disenfranchisement and seizure of power, only a third of voters told Gallup that they trust the legislature – sharply downward.
All of this means that the US has slipped in the direction of what the US military calls “vuca”: volatility, uncertainty, complexity and ambiguity. This week’s events are a symptom, not a cause.
How should investors react? First, you should expect asset prices to be volatile. Second, they should remember that the time horizon can change – and is now shortening. Third, they should note that it pays to accept companies with a “just-in-case” mentality rather than the “just-in-time” philosophy that has dominated global supply chain expansion over the past few decades.
Lastly, they need to realize that the environmental, social and governance trend, as well as the stakeholder mantra, will remain the one who wins the election. It’s not because the ESG is an activism tool. The main problem is that it is also a risk management tool. In a vuca world, it pays to be resilient, and companies can only do so if they pursue the “externalities” that were previously excluded from the models of economists – such as income inequality or climate change.
In other words, investors should take a sheet of paper from these Manhattan shopkeepers’ book: close the hatches; accept that the uncertainty will continue; Embrace the side view, not the tunnel view. Then conform with some metaphorical flowers.
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