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More Opportunities in China Beckon Foreign Managers

China lost some of its glow for investors since the collapse of A-shares in June last year, which precipitated volatility in global markets as well as in the RMB. However, in 2016, the booming asset management industry, with continued growth in every sector, cannot simply be ignored.

These are some of the key findings of Cerulli Associates‘ newly-released report, Asset Management in China 2016. Private funds is one area showing stunning growth, having expanded rapidly since the filing system with Asset Management Association of China (AMAC) was approved in 2014. Total AUM continued to rise, over 30% from end-2015, to reach RMB5.6 trillion (US$842.8 billion) at the end of second quarter 2016.

At the same time, the sector shows varying quality. To clean up shell companies and unqualified managers, AMAC deregistered nearly 10,000 private fund managers in the middle of this year. Nevertheless, more than 16,000 local private fund companies are still operating.

The long-awaited liberalization of the private funds industry finally received the go-ahead from the China Securities Regulatory Commission (CSRC) at the end of June this year. The Chinese authorities moved to broaden the business scope of WFOEs and joint ventures (JVs) by allowing them to establish onshore private securities funds under their own brands and directly invest into the Chinese market, including the secondary market.

“We should note that, despite the WFOE breakthrough, foreign exchange control measures remain in place, and so a WFOE’s fundraising activities and investment activities have to remain within China,” says Thusitha De Silva, director with Cerulli.

“For foreign asset managers that want to tap into the competitive local private fund industry, full-scale localization is necessary,” says Miao Hui, senior analyst with Cerulli who leads the China research initiative. “This should include distribution and investment networks, the capacity to handle legal issues, and local talent,” she adds.

Unlike many local managers, foreign asset managers typically have long-term time horizons. Pension funds and mutual funds, rather than private funds, could be their ultimate target product spaces to penetrate in China. However, to win domestic mandates, a domestic investment track record is necessary. Along with the deregulation of market entry, foreign asset managers could build up local teams, create brand awareness, and prepare for possible mandates.

2nd Annual Model Development, Validation and Risk Management in LATAM

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On November 14-16th, Marcus Evans will be hosting in Mexico City their 2nd Annual Model Development, Validation and Risk Management in LATAM. The conference will help financial institutions in Latin America to examine the effectiveness of their current efforts and policies around model risk and develop better programs to minimize model risk.

Delegates will learn how other financial firms across the region enhance their model development and validation techniques. Moreover, the key sources of model risk will be analysed and how firms respond to them. Last but not least, there will be practical examples of model risk control across various financial models.

Attendees will be able to:

Understand and reduce model risk in their institution
Gain a better understanding of how to measure the impact of model risk
Learn how to overcome major model development and validation challenges
Discuss the role that internal audit should play in model risk management
Evaluate different risk measurement techniques across LATAM
Improve control of model risk across different financial models

The conference is aimed at Chief Risk Officers as well as Heads of areas such as Internal Audit, Model Risk, Model Development, Credit Risk, Market Risk and Operational Risk.

For more information contact Alejandra Sacal.

Sotheby’s Acquires The Mei Moses Art Indices

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Sotheby’s has announced the acquisition of The Mei Moses Art Indices, which will now be known as Sotheby’s Mei Moses. Widely recognized as the preeminent measure of the state of the art market, the indices use repeat sales – the sale of the same object at different points in time – to track changes in value. Through this acquisition, Sotheby’s has unique access to an analytic tool that provides objective and verifiable information to complement the expertise of the Company’s specialists.

The indices comprise a constantly updated database of 45,000 repeat sales of objects in eight collecting categories, approximately 4,000 of which change hands each year. The methodology enables Sotheby’s to compare the investment performance of Art against various asset classes, analyze its performance against myriad benchmarks and competitors and measure the impact of macro-economic and societal forces on the art market. Sotheby’s Mei Moses uses existing data model and computation methodology to ensure consistency of the index.

“The collecting community is increasingly sophisticated and, in many cases, looking to analysis to understand the overall market, individual artist and category trends, the value of their collections, as well as gain insight into the timing of their consignments and purchases,” says Adam Chinn, Sotheby’s Executive Vice President. “We are very happy to be in a position to provide collectors with proprietary information tailored to their needs, while at the same time helping us identify and examine trends that can inspire further innovations within Sotheby’s to better serve an expanding client base.”

PIABA: After Report Detailing BrokerCheck System’s Flaws, No Action Has Been Taken

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It´s been two and half years since the Public Investors Arbitration Bar Association (PIABA) reported the “serious deficiencies in the background information provided about financial professionals to investors through FINRA’s BrokerCheck website”.

Now PIABA says that “FINRA did not fix BrokerCheck. Instead, the industry self-regulatory organization made things worse by spending millions in advertising to get unwary investors to rely on the flawed BrokerCheck system”. The press release of the Association says “examples of information routinely not included in BrokerCheck reports, but available from many state securities agencies, include the circumstances of a broker’s termination of employment (especially when the broker quits during the course of his firm’s investigation of his conduct), bankruptcy filings, tax liens, and test scores”.

As the PIABA report notes: “… FINRA’s conduct in promoting the BrokerCheck system as the only way to check those backgrounds and qualifications has imposed a disservice upon those investors using the system. The reality is that investors who may have once researched their brokers by contacting their state securities regulators have been led to believe they can simply rely on an online BrokerCheck report, which they can access themselves on the internet or through brokerage firm website links. Unless an investor is employed in, or otherwise familiar with the securities industry, the chances are negligible that they know that the BrokerCheck report may well be hiding relevant information.”

Report co-author and PIABA President Hugh D. Berkson said: “Before FINRA spent millions of dollars advertising BrokerCheck, it should have fixed its broken disclosure system. The current incomplete BrokerCheck reports are of limited value. As things stand now, FINRA claims to offer information ‘You might want to know about,’ but fails to offer information you definitely want to know about. Investors should not be subject to the vagaries of their local public records laws to ensure that they gain the information necessary to fully and fairly assess their potential financial advisor. The answer to the problem is so simple, and the result so meaningful, FINRA cannot be allowed to continue to hype a broken system it knows is of limited utility.”

PIABA Executive Vice President and President-Elect Marnie C. Lambert, who co-authored the report, said: “This is a major problem when it comes to what investors are relying on for information about their financial advisors. FINRA incorrectly advertises the BrokerCheck reports as being ‘complete’ and helpful to investors but, in reality, BrokerCheck reports often omit information about brokers that is highly relevant and necessary for investors to make informed decisions about who they may want to hire.”

In calling for action, the PIABA report states: “[I]f FINRA is serious about protecting investors and truly believes, as it has professed, that researching a broker is a meaningful part of an investor’s broker selection process, PIABA calls upon FINRA to:

Ensure that all complaints, arbitration awards, and settlements are promptly and accurately recorded in a broker’s and/or firm’s CRD record(s);
Ensure that the data disclosed via BrokerCheck is, at a minimum, congruous with the most liberal state sunshine law;
Include in BrokerCheck reports data concerning whether arbitration awards or settlements were actually paid;
Add statistical information on the BrokerCheck home page to allow an investor to put an individual BrokerCheck report into context (e.g., include statistics showing the total number of registered brokers in the industry and the total number in the industry with one, two, three, four, or more investor complaints on their record);
Open the entire BrokerCheck database to the public (e.g., academics and other third parties) to allow deep data analysis and development of quantitative and qualitative reports concerning brokers and brokers’ co-workers.

If FINRA fails to act, Congress should step to require more complete and transparent disclosure through BrokerCheck, according to PIABA.

September was Positive for the Investment Funds Market

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According to Otto Christian Kober, Global Head of Methodology at Thomson Reuters Lipper, assets under management in the global collective investment funds market grew US$167.6 billion (+0.5%) for September and stood at US$37.40 trillion at the end of the month. Estimated net outflows accounted for US$7.3 billion, while US$174.9 billion was added because of the positively performing markets. On a year-to-date basis assets increased US$2.43 trillion (+6.9%). Included in the overall year-to-date asset change figure were US$306.9 billion of estimated net inflows. Compared to a year ago, assets increased a considerable US$3.44 trillion (+10.1%). Included in the overall one-year asset change figure were US$664.8 billion of estimated net inflows. The average overall return in U.S.-dollar terms was a positive 0.7% at the end of the reporting month, outperforming the 36-month moving average return by 0.6 percentage point.

Most of the net new money for September was attracted by bond funds, accounting for US$37.9 billion, followed by mixed-asset funds and real estate funds, at US$6.8 billion and US$0.8 billion of net inflows, respectively. Money market funds, at negative US$46.7 billion, were at the bottom of the table for September, bettered by alternatives funds and equity funds, at US$2.9 billion and US$2.6 billion of net outflows, respectively. All asset types posted positive returns for the month, with commodity funds at 2.4%, followed by “other” funds and real estate funds, with 1.8% and 0.9% returns on average. The best performing funds for the month were commodity funds at 2.4%, followed by “other” funds and real estate funds, with 1.8% and 0.9% returns on average. Money market funds, at positive 0.3%, bottom-performed, bettered by mixed-asset funds and alternatives funds, with positive 0.5% and positive 0.6%, respectively.

Most of the net new money for the year to date was attracted by bond funds, accounting for US$409.9 billion, followed by commodity funds and “other” funds, with US$26.9 billion and US$5.5 billion of net inflows, respectively. Equity funds, at negative US$92.5 billion, were at the bottom of the table for the year to date, bettered by alternatives funds and money market funds, with US$23.6 billion of net outflows and US$20.5 billion of net outflows, respectively. All asset types posted positive returns for the month, with commodity funds at 11.9%, followed by “other” funds and bond funds, with 7.9% and 7.8% returns on average. Money market funds, at positive 2.0%, bottom-performed, bettered by alternatives funds and real estate funds, at positive 2.0% and positive 6.3%, respectively.

Most of the net new money for the one-year period was attracted by bond funds, accounting for US$420.4 billion, followed by money market funds and commodity funds, with US$219.9 billion and US$24.9 billion of net inflows, respectively. Alternatives funds, at negative US$34.8 billion, were at the bottom of the table for the one-year period, bettered by “other” funds and real estate funds, with US$0.6 billion and US$5.3 billion of net inflows, respectively. All asset types posted positive returns for the one-year period, with equity funds at 10.8%, followed by “other” funds and mixed-asset funds, with 10.5% and 8.5% returns on average. The best performing funds for the one-year period were equity funds at 10.8%, followed by “other” funds and mixed-asset funds, with 10.5% and 8.5% returns on average. Money market funds, at positive 1%, bottom-performed, bettered by alternatives funds and commodity funds, at positive 1.3% and positive 2.6%, respectively.

Looking at Lipper’s fund classifications for September, most of the net new money flows went into Bond USD Medium Term (+US$7.8 billion), followed by Equity Japan and Equity Emerging Mkts Global (+US$6.5 billion and +US$5.8 billion). The largest net outflows took place for Money Market USD, at negative US$32.9 billion, bettered by Money Market KRW and Equity US, at negative US$10.7 billion and negative US$8.7 billion, respectively.

Looking at Lipper’s fund classifications for the year to date, most of the net new money flows went into Bond USD Medium Term (+US$98.4 billion), followed by Bond USD Municipal and Money Market GBP (+US$46.4 billion and +US$43 billion). The largest net outflows took place for Equity US, at negative US$64.2 billion, bettered by Equity Europe and Mixed Asset CNY Flexible, at negative US$48 billion and negative US$47.7 billion, respectively.

Looking at Lipper’s fund classifications for the one-year period, most of the net new money flows went into Bond USD Medium Term (+US$112.8 billion), followed by Money Market USD and Money Market CNY (+US$78.5 billion and +US$68.2 billion). The largest net outflows took place for Equity US, at negative US$55.2 billion, bettered by Mixed Asset CNY Flexible and Equity Europe, at negative US$33.4 billion and negative US$33.0 billion, respectively.

Scarier than Halloween, at Least for the Markets…

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According to Anthony Doyle, Investment Director at M&G Retail Fixed Interest team, the financial world is a scary place. Debt, disinflation and deteriorating growth have plagued investors over the past year, plunging bond yields into negative territory in a number of countries. Perhaps most frighteningly, it is now eight years since the financial crisis and central banks in the developed world continue to employ an ultra-easy monetary policy stance. With government bond markets currently resembling a freak show at an extended point in the economic cycle, one may think that the next global recession could be around the corner. There is no need to watch scary movies this Halloween, as the following makes for some frightening reading.

Owning government bonds is a scary thing to do.

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Developed market government bonds have been one of the best performing asset classes in 2016, confounding many predictions at the start of the year. In general, the right trade has been to own long duration assets, indeed the longer the better. Year after year investors predict that bond yields will rise and year after year bond yields make new lows. Of course, there are some very good reasons to expect this trend continue.

However, bond markets now expect that monetary policy normalisation won’t occur until some point in the distant future. Low inflation means that central banks continue to support their heavily indebted and ailing economies, resulting in almost $10 trillion worth of developed market government bonds trading with a negative yield. As a result, many companies – including banks – are struggling in this low (and negative) interest rate world. These companies are finding their existing business models challenged in an environment of low growth and tighter regulation. Pressures in the financial system are building, and it is unclear how these issues will be resolved.

Central banks are fearless. They own a lot of the bond market.

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Central banks sizable purchases in government bond markets through quantitative easing means that term premiums (the extra amount that investors demand for lending at longer maturities) have been pushed further into negative territory. It was once inconceivable that investors would pay for the privilege of lending to a government. Now this phenomenon is commonplace not only in government bond markets but also for some recent corporate bond issuance.

It isn’t only central banks that are at the bond buying party. Demand continues to increase for long duration assets, from other large institutions like pension funds and insurance companies. The combination of central banks, pension funds and insurance companies has limited any sell-off in bond markets, reducing yields across the bond curve. Aging demographics means that safe haven assets may continue to remain in demand, forcing investors into riskier assets if they want to generate a positive real return.

If inflation rises, or interest rates go up, look out below.

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Despite the negative yield environment we now find ourselves in, how central banks react to the next inflationary shock will have huge ramifications for bond inventors. With global bond portfolio duration close to 7 years, investors could face large capital losses if rates were to increase in a meaningful way. This raises a number of important questions. Will central banks hike rates in an environment of stagflation? How will politicians react when the paper losses on QE bought portfolios held at central banks are reported in the media? Could central bank independence come under threat? As many banks and insurance companies own long dated assets, will financial instability increase when long-dated bonds experience large capital losses?

Currently, the market is more focused on secular stagnation than inflationary concerns, but with oil up almost 100% from the February lows and trade protectionism starting to begin to carry favour in government buildings around the world, a global inflation shock might be closer than many currently expect.

Political risks in emerging markets could lead to forced selling.

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Several emerging market sovereigns have been downgraded over the course of the past year, with ratings agencies highlighting political uncertainty as a major factor in the decision. The impact of the downgrade has been felt immediately, with heightened volatility in bond markets the result.

Large inflows into emerging market bond markets has left some countries vulnerable to increased political risks from abroad. Mexico is a good example given the current uncertainty surrounding the U.S. presidential election. Many emerging markets are also vulnerable should the US dollar strengthen, a possibility given the U.S. FOMC is by far and away the closest of any of the major central banks to hiking interest rates. An additional risk is the possibility of a large emerging market nation being downgraded from investment grade status, causing forced selling of hard currency debt by foreign investors.

China faces a huge debt overhang. Be afraid.

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The most dangerous four words in finance are “this time is different”. And when it comes to credit booms, they don’t tend to end well.

One measure economists look at determine excess credit growth is a country’s credit overhang. This measures the difference between the credit-to-GDP ratio and its long-term trend. It has proven to be a reliable indicator, with the Bank of International Settlements stating that “in the past, two-thirds of all readings above this threshold (of 10) were followed by serious banking strains in the subsequent three years”. China’s credit-to-gross domestic product “gap” now stands at 30.1 percent, the highest for the nation in data stretching back to 1995, suggesting the banking system could already be coming under severe pressure.

“Numerous warning signs are flashing amber or red in the Chinese financial system, given that huge swatches of renminbi have gone into financing large-scale real estate projects and new production capacity for industrial sectors of the economy. This toxic combination of high and rising debt in a slowing economy tends to lead to an economic deterioration. As authorities continue to chase economic growth, capital is funnelled into unprofitable projects and overcapacity. Eventually, prices begin to fall and borrowers face large capital losses. Additionally, much of the finance available for investment projects was made available through the shadow banking system, which is more susceptible to a sudden stop in capital flows and a run on deposits.” He concludes.

OppenheimerFunds Launches an International Growth and Income Fund

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OppenheimerFunds, launched the Oppenheimer International Growth and Income Fund (Ticker: OIMAX). The fund is managed by Robert Dunphy, co-portfolio manager of Oppenheimer International Growth Fund, who joined the firm in 2004.

“We’re delighted to build on the success of our Oppenheimer International Growth Fund which celebrated its 20th anniversary earlier this year,” said Krishna Memani, Chief Investment Officer of OppenheimerFunds. “The fund seeks to expand on the success factors of the Oppenheimer International Growth Fund to investors looking for income in addition to long-term capital appreciation.”

The Oppenheimer International Growth and Income Fund will seek total return by investing in cash generative, dividend paying companies that may benefit from long-term secular growth trends. “Long-term investing must involve a disciplined investment process and the ability to look beyond index compositions or fleeting trends,” said George Evans, CIO, Equities, and Portfolio Manager Oppenheimer International Growth Fund. “Our strategy for this fund aims to do exactly that, to ascertain the true growth potential of companies.”

“Our investors want access to international companies that have structurally sustainable growth advantage, ignoring index biases,” commented Kamal Bhatia, Head of Investment Products and Solutions, OppenheimerFunds. “Designing products that can simultaneously participate in shareholder friendly income satisfies multiple client needs.”

OppenheimerFunds, a leader in global asset management, is dedicated to providing solutions for its partners and end investors. OppenheimerFunds, including its subsidiaries, manages more than $222 billion in assets for over 13 million shareholder accounts, including sub-accounts, as of September 30, 2016.

Managing Political Risk in Investment Portfolios

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What should investors expect in the forthcoming months in terms of political agenda? Is the European Union in the eye of the storm, with countries such as Italy currently under the scrutiny of markets, or is it the US, where the outcome of the presidential election will decide whether the country will enjoy a fiscal stimulus or not? According to Unigestion, rising income inequality and the drop in GDP per capita in the Western world help explain the behaviour of voters. How should investors hedge their portfolios against this political risk? Most of these factors are potential sources of volatility, but what if a genuinely anti-market leader comes into power in a large Western economy?

Political risk is everywhere these days: just look at the Brexit headlines, the US election debates and the drama around Brazilian President Rousseff. The resurgence of political risks is probably a result of a turnaround in the perception of what globalisation does to the world. Globalisation has been a rising trend since the end of World War II and it has accelerated since China joined the World Trade Organisation (WTO) in 2000. It has been an economic game changer: China experienced double-digit GDP growth at a time when Western economies had entered a period of structurally slower growth. The public is now showing signs of frustration regarding this phenomenon: what seemed a necessary evil, greasing the wheels of the world economy, is now perceived as a “rip-off”, as Donald Trump put it during his first debate with his Democrat opponent, Hillary Clinton. Beyond the theoretical debate around free trade, the perceived loss of economic sovereignty in the developed world is fuelling the rise of anti-establishment parties. The Brexit vote was the first crystallisation of this anti-establishment sentiment, and this anti-establishment theme will play a significant role during the heavily loaded political agenda in the remainder of 2016 and into 2017. We think political risk – the rise of political parties challenging the 20th century’s economic solutions – needs to be cautiously monitored as it is likely to be a factor in the performance of many investments.

Since many Trump fans are unlikely to openly admit to pollsters that they will vote for him, his real popularity is probably higher than the opinion polls suggest. Political uncertainty is therefore challenging for markets not because it brings about change but because that change is often preceded by a period of uncertainty. When listing potential hedges against political risks, investors typically think of gold, forex, equity volatility, bonds and the US dollar.

On average, implied volatilities display a tent-shaped pattern around US elections, rising in the month preceding elections along with the build-up in expectations and then falling quickly thereafter as the event becomes “priced in” or passes. A long position in volatilities therefore would work as a shock absorber to any risk-oriented portfolio. Safe- haven assets offered little protection on average. In the case of gold, it actually shows a reverse tent shape, posting negative returns ahead of and after elections: volatility seems the best potential hedge for such short-lived episodes.

“Political risk is on the rise, yet markets show little sign of pricing this in. There are fundamentals explaining its rise, and most of them will remain with us for an extended period of time: globalisation, lower standards of living and limited government leeway to change these fundamentals, fuelling popular frustrations. The US elections and later the Italian referendum are the next two events that investors should follow cautiously, especially as next year will feature potential anti-establishment votes. We recommend using forex and equity volatility to hedge this risk as these are the assets that show the strongest connection to such episodes of heightened volatility and the drying up of liquidity. The only caveat is that these approaches ought to work provided the political risk creates only short-term shocks, and not a longer-lasting blow to markets.” They conclude.

S&P Global Names Maria R. Morris to Board of Directors

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S&P Global announced that its Board of Directors has elected Maria R. Morris to its Board, effective immediately.

Morris is Executive Vice President of MetLife, Inc., responsible for the company’s Global Employee Benefits business, and is interim head of MetLife’s U.S. business. As head of Global Employee Benefits, she is responsible for expanding the business in more than 40 countries through local solutions, partnerships with multinational corporations and distribution relationships with financial institutions.

“Maria has demonstrated exceptional business leadership at MetLife,” said Charles E. “Ed” Haldeman, Jr., Chairman of S&P Global. “Her business and financial acumen and understanding of international markets further strengthen our talented Board of Directors.”

“We are delighted Maria is joining our Board and look forward to benefiting from her deep operational experience managing large, global enterprises,” said Douglas L. Peterson, President and Chief Executive Officer of S&P Global.

Morris joined MetLife in 1984, holding a number of senior leadership roles. She has served as interim Chief Marketing Officer, Head of Global Technology and Operations, Executive Vice President for Employee Benefits Sales; Vice President and head of MetLife’s Group and Individual Disability businesses, and head of the Dental business.

Morris serves on the Boards of Directors of MetLife Property and Casualty Insurance Company, the MetLife Foundation and the American Council of Life Insurers. She is also a member of the Board of Trustees for the Catholic Charities Archdiocese of New York and is Vice Chair of the All Stars Project, Inc.

The addition of Morris brings the number of S&P Global Directors to 12. Morris’ nomination follows the appointments of Rebecca Jacoby in 2014 and Monique Leroux last month. These women are leaders with critical experience in finance, investing, technology and global business operations. Their appointments underscore the Company’s commitment to inviting diverse backgrounds, perspectives, skills and experience into the Board room to guide the growth and performance of S&P Global.

Don’t Cry Over the New Politics: Price it In, and Address its Real Concerns

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If you want a picture to sum up how the politics of globalization have changed since the financial crisis, watch Canada’s trade minister, Chrystia Freeland, holding back tears last week as the Parliament of Wallonia refused to ratify the Comprehensive Economic and Trade Agreement between her country and the European Union.

CETA had its origins in October 2008. Back then, the executive European Commission would have expected to pass this agreement unilaterally. They felt the need to seek ratification from national parliaments because, since 2008, we’ve had the Great Recession, the Eurozone crisis, controversy over a similar E.U.-U.S. trade deal, Brexit, and the rise of Donald Trump. Belgium couldn’t ratify until all of its regions were onboard, the Wallonians weren’t having it—and so 75 lawmakers held the interests of 500 million Europeans and seven years of painstaking negotiation in the balance.

It’s tempting to dismiss the Wallonians as benighted protectionists blind to the wider benefits of trade and globalization. The more sober response is to acknowledge the very real difficulties globalization has created for working people in the developed world, and the very real controversies surrounding the new arbitration tribunals created by these new trade agreements, which some argue undermine democracy in favor of big business.

Investors need to acknowledge and understand these issues because debate around them will establish the context against which capital operates over the next generation.

Polarized Debate Obscures Real Issues

In the immediate aftermath of the Brexit vote and the run-up to next week’s U.S. presidential election, those debates around sovereignty, trade, globalization and immigration have not been very helpful. It’s difficult to make a reasoned contribution. Positions get simplified and polarized. You’re either for or against immigration. You’re asked to vote to leave or remain in the E.U.

When I travel through Europe today I tend to get asked, “When did Americans become so anti-trade and anti-immigration?” And of course the answer is they didn’t. But working and middle-class Americans have started asking whether the trade deals struck by their political representatives really benefit them, how such a vast number of undocumented workers get through the immigration system, and whether business still offers them and their children opportunity, rather than just exploitation.

These are perfectly reasonable questions. The share of GDP going to labor has declined relentlessly this century. Over the same period the number of “breadwinner” jobs paying at least $45,000 fell from 73 million to 70 million, while those paying $20,000 or less have grown from 35 million to 40 million. If it’s reasonable to ask these questions, they won’t go away after next week’s election, regardless of the result.

Less Technocracy, More Democracy

If anything, these concerns will receive more mainstream attention once the electoral temperature has cooled. That’s partly because the mainstream is learning that, when they don’t get a hearing, many voters will back populists despite knowing their solutions are as likely to hurt as to help them. It’s also because politicians recognize that they need to do more now that central banks are at the limits of their effectiveness—and perceived to be part of the problem, into the bargain.

This is relevant for investors in two big ways, one short-term and one longer-term.

First, the transition from economies being driven by central-bank technocrats with their forward guidance, to economies being driven by politicians with their restless constituents, represents a meaningful increase in market risk. The Wallonia incident shows how a little extra democracy can throw a lot of extra sand into the wheels of global capitalism, and the premium for that kind of risk is already starting to be priced into markets.

Second, it’s worth remembering that addressing these concerns may be painful for providers of capital today, but real solutions to them are essential to capital, trade and globalization in the longer term. Disappointment with opportunity in today’s economy will continue to drive the debate around trade and immigration for years to come. These are complex issues requiring thoughtful and balanced solutions, not rancor and hyperbole.

It makes sense to “turn the channel” on the current political noise and focus on economic fundamentals, as Joe Amato has advocated in recent posts. But as you do, keep in mind the real issues behind the sound and fury—issues that require real solutions, which will have a real impact on the economy and your investments over the coming years.

Neuberger Berman’s CIO insight