To Scale Alleged Risks, Fisher Investments UK Says Think Globally

In Fisher Investments UK’s experience, it is common to see financial commentators stress country-specific issues as potential threats to world equity markets. In just the past 10 years, we have seen them do so with Greece’s debt worries, Brexit, Italy’s fragile banking sector, potential tax hikes in America and so many more. In our view, there is an antidote to all of this: thinking globally. We think putting country-specific risks in broader context can help a globally orientated investor see issues in their proper light.

Now, the above-noted list contains some matters that truly were negative on a country-specific level, in Fisher Investments UK’s view. Greece did have debt problems, requiring three financial aid packages from the European Union, European Central Bank and the International Monetary Fund in the period 2010–2016. Even with this, the country failed to pay interest and principal on its government debt three times, forcing investors to take losses on bonds they owned. The uncertainty and strain saw the country shed nearly a quarter of its GDP (gross domestic product, a government-produced measure of national economic output) between 2009 and its low in 2016.ⁱ In the mid-2010s, Italy’s banking sector did have some fragile aspects, although our research showed this was commonly overstated. Brexit was a mixed bag and did create some regional difficulties for the UK and EU, although many analysts we followed presumed it was automatically negative as it may have increased tariffs and other trade barriers between the UK and EU, ushering in protectionist trade policy in the process. Ongoing American tax hike talk? Few like tax hikes, and many financial commentators we follow (in our view, wrongly) warn they will hit markets.

To analyse these issues, one tool Fisher Investments UK uses is scaling them globally—comparing their size and scope to the global economy or capital markets. Consider: According to World Bank data, global GDP finished 2020 at $84.7 trillion (62.0 trillion).ⁱⁱ This is the annual flow of economic activity taking place worldwide, suggesting a recession driver has to carry a punch in the multiple trillions to materially impact activity worldwide. This was very helpful, for example, in assessing Greece, in Fisher Investments UK’s view. Greek GDP in 2009—before the country’s debt crisis hit—amounted to $330 billion (241.4 billion)—0.5% of 2009 world GDP.ⁱⁱⁱ Hence, the huge decline that followed just didn’t impact activity enough to materially affect world economic growth. It may have been a temporary hindrance—and it hit investor sentiment at times during the 2009–2020 bull market (a bull market is a long period of overall rising equity prices). But it didn’t end the bull market—COVID lockdowns, which interrupted trillions in economic activity worldwide, did.

We think the same holds for Brexit, which created some very real concerns amongst analysts we follow regarding how the important EU/UK trade relationship would work before the free-trade pact was signed in late 2020. Fisher Investments UK analysts also think it affected many more granular things, like trade between Northern Ireland and Britain and British financial services firms’ access to the Continent. We think that stirred uncertainty some.

Whilst these issues are real, thinking globally can help put them into perspective. For one, our research showed most of the issues here were local headaches and hiccups that might slow or hinder trade, but they wouldn’t stop it. For example, if Britain had exited the EU with no free-trade agreement, tariffs would have come into effect. But they would have been at very low World Trade Organisation rates, which average 1.5%.^iv Those rates vary by sector, but even the higher-end ones—like a 10% tariff on autos—aren’t giant, in Fisher Investments UK’s opinion. We think such tariffs could have slowed trade in select goods regionally. But what was the likelihood these could generate a trillion-dollar hit to world output? In our view, it was low.

Currently, many American financial commentators we follow warn President Joe Biden’s Democratic Party will hike taxes, hurting markets. In our view, there are several reasons not to fret this. One, those tax hikes may not pass through Congress and become law. Two, our review of market history shows tax hikes aren’t automatically bad for equities. We think surprises move markets most, and tax hikes are normally widely watched due to the bright media glare—this time seems like no exception to us, given all the talk in financial publications we read. We think that saps tax hikes’ surprise power. But beyond this, think globally. Yes, America is a big economy—24.7% of 2020 global GDP.^v But that means three quarters of world economic growth is outside America. Furthermore, tax hikes hurt income on the margins only. In the current scenario, Biden’s Democratic Party is proposing to hike corporate taxes from 21% to 26.5%, whilst raising income and capital gains taxes on high earners.^vi The corporate tax hike would put rates below the 35% that prevailed before 2017. The broad impact of these seems small to us—too small to hit even US economic growth materially, much less the world’s.

When you see commentators highlight a country-specific story as a negative for equities worldwide, we suggest thinking globally first. That can give you important context to understand the story’s scope and whether it is likely to pack the punch needed to hurt the global economy and markets, in Fisher Investments UK’s view.

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