Deutsche Bank : Politics, populism and power

Cover story Politics, populism and power

Many investors think of themselves as apolitical, however, recent market turbulence has reinforced just how much politics can affect business and finance. This issue of Konzept offers

incisive opinion on some pressing political issues, including the trade war between China and the US, next year's US presidential election,

European populism, technology regulation, Brexit, and more. We also

examine how the latest developments in artificial intelligence and machine

learning are helping investors forecast the market impact of political events.

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Editorial

It is hard to pinpoint many times in living memory when politics has consumed more column inches, investor energy, and even dinner party conversation than it does today.

That is why in this fifteenth edition of Konzept, Deutsche Bank's flagship research magazine, we assess some of the most pressing political issues in 2019 and examine their impact on economies, markets, and society.

We start with the big picture, and examine the increasing number of countries using infrastructure projects as geopolitical tools. The US, Russia, China, and Europe are all intertwined in political brinksmanship with new infrastructure for energy, transport, and security purposes. While these projects are often cost ineffective, they operate as chess pieces, sometimes blocking political channels of rival countries, while opening channels elsewhere for future use. Interestingly, the use of infrastructure in this way is not a new phenomenon and a look through history helps us understand the motives and potential outcomes.

Our second feature also looks to history as a useful guide to show how the current tide of populism will change the economic landscape in many countries. Indeed, lessons from various revolutions and uprisings through history show us that populism tends to be rooted in economic despair for workers and eventually inspires fiscal expansion that puts upwards pressure on inflation. Ironically, we argue that labour is on the verge of regaining some of its lost power due to changing demographics and this could amplify the power workers are just beginning to enjoy.

We then take a tour of the most politically interesting countries in the world to see what 2019 has in store. In particular, we interview long-time Washington insider Frank Kelly who gives his candid his views on the chance of legislative agreement, deficit spending, the 2020 presidential election, the relationship between President Trump and the Fed, and US trade policy. From the other side of the fence, our Chief China Economist examines China's changing foreign policy in light of the current trade war with the US.

In Europe, we consider what Germany will look like in the post-Merkel era and, separately,

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explore the chance of agreement on the continent's most crucial issues against the backdrop of this year's European elections, at which populists are predicted to do well. With the news on Brexit being extremely fluid at present, we speculate on what an outsider might see when they tour a post-Brexit Europe and UK in the future.

Our final two pieces are anchored in technology. The first looks at the whirlwind year technology groups endured in 2018 and explains that political momentum on network neutrality and mergers and acquisitions could reshape technology and media companies just as much as new laws on data privacy.

Our second technology-focussed piece shows how Deutsche Bank's artificial intelligence and machine learning platform, Alpha-dig, can quantify geopolitical risk. For investors, this is a giant leap forward. On average we find that following a significant political event, equities outperform bonds by four percentage points over the following two months. Importantly, this outperformance is not the result of a sudden jump in markets,nor is it linear. If investors can use AI to better understand the market impact of political events it will move political risk from being one of the most subjective risks in investing to being a quantifiable input that portfolio and risk managers can objectively examine.

We hope this edition of Konzept gives you some clarity on some of the most pressing, changeable, and curious political issues we face in the world today. When we look back on 2019 in years to come, it will be interesting to see whether we are truly living in a time of exceptional political instability and fracturing or whether the intensity of today's political conversations will crescendo further in the years ahead.

Jim Reid

Global Head of Fundamental Credit Strategy and Thematic Research

To send feedback, or to contact any of the authors, please get in touch via your usual Deutsche Bank representative, or write to the team [e-mail]