Rising inequality in developed markets – although reduced inequality worldwide due to increasing standards in emerging markets – gives rise to voter discontent and populist policies – first the right and then the left.

Intervention can occur in several ways – trade tariffs, tax changes (negative gearing, franking credits), royal commissions, state ownership of private assets (Corbyn) – but all bring uncertainty and risk for investors.

Globally we see a retreat from the free(r) market values that have underpinned the globalisation process. The world believed that once China secured more wealth, the Chinese would embrace Western values. This was mistaken, and we view the recent trade friction between the US and China as a symptom of a recalibration in western policy to China’s expanding political and military goals.

In the short-term everyone loses from a trade war, just to differing degrees. Manufacturers sell fewer goods and consumers pay more for the goods that they can buy.

The United States is gambling that the impact to the Chinese economy is greater than the impact to US consumers – this is probably true – giving them an upper hand in redefining the trade paradigm for the next 15-20 years.

An escalation of the trade dispute will further anchor declining global growth, place downward pressure on oil prices and upwards pressure on core US inflation – which could, in turn, mean faster tightening by the Fed. These are all significant risks, however, the major impact has been to investor confidence, and this drove the stock market falls in the last quarter of 2018. Global markets have been on high alert for the ‘trigger’ that will bring this long bull market to an abrupt end – this trade dispute has, in turn, triggered a large withdrawal from risk markets.

In Australia, we are due for a federal election by May this year. For investors, the election is the most significant in recent memory due to the large differences in economic policy between the two major parties.

A Shorten Government is expected to pursue a higher taxing, higher spending platform; with significant money for health and education. Conversely, the Coalition has dangled tax cuts; individual and corporate, and a return to budget surpluses to win over voters.

A Labor Government poses a greater risk for investors as the funding for these investments is proposed to come from the removal of franking credit refunds, a reduction in the capital gains tax discount exemption and changes to negative gearing rules. Further to this, it raises the prospect of a stronger, more militant and pervasive union movement, which could heighten stock-specific risk in union dominant industries.

As partners in your investment journey, it is important to us that we take the time to share key aspects of our approach and philosophy.

This article is part of our 2019 Economic and Investment Strategy Guide and one such starting point in our highly considered process that will ultimately manage downside risk and maintain the real value of capital.

For further reading of our 2019 Economic and Investment Strategy, please click one of the links below:

• Quantitative Tightening – The end of cheap money

• Slowing Global Growth – Diverging Fortunes

• Debt Hangover – Credit Tap Turns Off

For more information on our approach to economic strategy or to obtain your own copy of our 2019 Economic & Investment Strategy Guide, please contact us on +613 9655 5000.