Democracy is under attack. This calls into question the global leadership of the world’s most significant rich economies. From within they are under siege from populism. Externally, their status is being undermined by alternative social systems which are delivering improved economic well-being, but at the expense of increased surveillance and oppression. This is new. Over the past two centuries, dictatorships never came close to rivalling the economic dividends of the ballot box. Now, in relatively few, but highly-significant cases, dictatorships have developed integrated political, social and economic models that can compete.

The merits of our carry trade basket have faded over the past 12 months. There remains a yield pick-up in Brazil and Russia, but Argentina offers the double-digit appeal of the carry trades of old (i.e. pre-crisis). We now abandon this trio. But we haven’t deserted higher-yielding EM FX entirely. Mexico stands out to us as a long. There are uncertainties surrounding NAFTA and there are political risks. But we think both are compensated for. Monetary policy is too restrictive, meaning inflation will fall faster than expected, and the currency remains fundamentally cheap. We would be long the Mexican peso versus the US dollar.

Protectionism and the collapse of the business model of soft-tech giants is a bigger threat to global equity markets than rising interest rates. If the next bear market starts, it will be because of these two factors. The protectionist fall-out will hit the US economy and the dollar the hardest. This is because it represents a retreat by the US into isolationism and away from the technological drivers of economic growth. The financial market hit will be focused on US equities, bonds and the dollar but global equity markets will also share the pain.