Around half of the world’s population, some 4 billion people, will have the opportunity to go to the polls for national elections in 2024. For many, it’s the first chance to have a say since the COVID-19 pandemic and comes at a time when disaffection among voters has reached record highs.
The consequences of this apathy have been on full display in the recently held French election, with the electorate flirting with both extremes of the political spectrum. During the two round National Assembly vote, a dominant performance from Marine Le Pen’s far-right National Rally was reversed by the eleventh-hour manoeuvrings of a newly formed, far-left collation. That the second round drew the largest voter turnout in over four decades is a somewhat unfortunate indictment of the current state of western democracy. Despite the wild swing from right to left and the uncertainty of a government coalition going forward, the market reaction has been relatively muted. This reflects both the difficulty of pricing such events, and the reality that markets generally don’t trouble themselves with politics until they are forced to. This appears to be the view taken by Alexander Darwall from the European Opportunities Trust (EOT) who noted that while the extent of the political change, or stasis, in France is not yet clear, he remains “relatively sanguine” about the effect this will have.
Much less surprising, however equally groundbreaking for the political left was the recent sweep by Labour in the UK elections after 14 years of Conservative party dominance. For many, the hope is that a fresh set of eyes can help the UK emerge from over a decade of poor economic performance following the 2007-09 financial crisis, made worse by the impact of Brexit (which has cost the UK’s economy around £140bn according to one estimate) and the disastrous mini budget. During a recent interview with QuotedData (which you can view here), Blackrock Throgmorton (THRG) manager Dan Whitestone outlined that he doesn’t see a new government as a big risk for markets, noting that the pro-growth political agenda appears to be a far cry from the Labour party of old. While making clear he can’t speak to many of the developing policy specifics, Dan believes that perhaps the biggest takeaway from the recent election is about stability. He says that one of the comments he has heard most from discussions with company management teams over the last few years is how difficult it has been to make long term investment decisions due to policy uncertainty. Granted this has not just been a UK centric problem, with the pandemic and resultant inflation spike creating a world of issues, although, as Dan notes, this has been made worse by a revolving door of ministers within the Tory party. It is hoped that with a strong mandate, and the worst of the economic challenges hopefully in the rear-view mirror, the stage has been set for a much less tumultuous turn at bat for the incoming government.
The theme of dramatic political shifts continues with India, the world’s fastest growing major economy. Having overtaken the UK, India is on track to pass both Japan and Germany in the coming years, to become the world’s third largest economy. Much of this is thanks to reforms driven by Prime Minister Narendra Modi. The long-term leader of the Bharatiya Janata Party (BJP) has become synonymous with Indian politics and was expected to romp to another landslide victory in the recently held elections, as he had done in 2019 and 2014. While the party secured its third, five-year term, the result was worlds away from the potential supermajority it had hoped for, with the BJP forced into an increased reliance on collation partners to form a government. The surprise result appears to be in response to Indian’s steady descent into democratic backsliding, despite the strong economic progress, providing yet another example of discontent among voters. The initial market response was dramatic with a record $1.5bn in foreign asset sales following the announcement. As James Thom from abrdn New India (ANII) describes, the selling likely reflects the view that Modi’s agenda to pursue market-friendly policies, including possible changes to land and labour laws, may be watered down due to political concessions. He also noted that in addition to the economic performance, a lot of India’s valuation premium is thanks to the political continuity of the Modi government over the last decade, which is now showing its first signs of frailty.
Looking ahead, all eyes will now be squarely fixed on the November 5 elections in the US with the theme of continuity front and centre as concerns mount about President Biden’s candidacy and his ability to stand for another term. The question for Democrats remains whether the benefits of a late stage exit for Biden outweigh the risks of a contested convention and whether their odds of victory would improve under likely replacement, Vice-President, Kamal Harris. At present, prediction markets see the most probable outcome as a Republican sweep of the presidency, House of Representatives and the Senate, the odds of which increased significantly following the first presidential debate in June.
The economic and geopolitical ramifications of such an outcome are difficult to quantify, however, markets have started to factor in the inflationary impact of proposed tariffs, the reversal of immigration policies, and the potential for further fiscal deterioration due to tax cuts. In addition to more traditional policy implications, there remains a range of unknowns including the recent Supreme Court decision relating to presidential immunity and additional legal challenges. From a purely financial perspective, the potential impact of these factors is impossible to price, however as Fran Radano from North American Income Trust (NAIT) notes, we have already seen the increased uncertainty flow through to consumer sentiment numbers in the US. Unfortunately, it seems likely that things will continue to get worse before they get better, which is particularly concerning given the high stakes of the US election, the already prevalent fears around fiscal excess driving the treasury market, and concerns surrounding both parties, such as whether Biden can remain in the race, and the ongoing fallout of the January 6 capital riots.
As we have seen, markets appear to crave political continuity and while there are promising signs of this for the UK, it’s difficult to say the same thing about many of the world’s other leading economies. That this is set against a backdrop of rising populism, voter disaffection and the steady shift away from globalisation since the pandemic creates further cause for concern.