Election Bonanza: Living in a Fragile World

Market Update: Election Bonanza

The year of elections has not disappointed so far.

This last week gave us one of the most significant weeks on the political agenda so far. A widely expected handover of power in the UK was followed by a surprise majority for France’s left wing, not to forget a shake up in the U.S. Presidential race.

Volatility around political events tends to be short-lived, but the growing need to address excessive government debt loads across the world brings with it some important considerations for investors. Today, we look to unpack what we have seen across jurisdictions and what that could mean for portfolios looking ahead. 

UK: Dullness dividend

As had been widely expected, Keir Starmer and the Labour party were handed the keys to 10 Downing Street. Their victory at last Thursday’s UK General Election marked the largest parliamentary majority in almost three decades.

The market response was muted, reflecting a broad acknowledgment that this result had been well-telegraphed for some time. Such a wide margin of victory does give the Labour party more scope to dictate policies with little opposition over the coming term, but we expect them to maintain their centrist view laid out in the lead up to the election at least for now. Living in the shadow of 2022’s mini budget saga, they will be all-too aware of the potential market implications of “unfunded” spending plans.

Further out, Labour’s “pro-growth, pro-business” manifesto laid out medium-term policy reforms targeted at dragging the UK out of its low-growth rut of the past 15 years. Those will take time to have a genuine economic impact, but increased stability in the UK political landscape (after a challenging few years) should provide some form of “dullness dividend” for the UK economy and assets for now. We wrote in depth on the potential impact for investors here.

France: Hung in the balance

French snap legislative elections concluded yesterday. The highest polling turnout in decades left no clear majority, with the lower house left in a hung parliament. That outcome in itself came as no surprise, but the composition of that hung parliament was unexpected. The left-wing alliance (New Popular Front) took the most seats, closely followed by Macron’s Ensemble Coalition in second and Marine Le Pen’s National Rally Alliance in third. That marks a notable turnaround from the far-right’s resounding victory in the first round on June 30^th.

After Macron called the snap election to provide the nation with “clarification” on its political stance, many have argued that there is even greater uncertainty now. Left-wing party leaders have claimed victory and expressed their desire to push their program forward. Their stated program is quite fiscally expansive, and the market is wary of it given France’s already large debt load. However, with such a low number of seats, applying this program looks difficult.

The bottom line is that we are likely in for a number of weeks of uncertainty and negotiations as no single party or bloc has enough seats to form the next government. We are likely to see a coalition, although more left leaning than expected before the result, but little else beyond that is clear. Still, we think markets can take some comfort as the tail risk of the far-right or far-left winning a free hand to implement relatively extreme policies is not materializing. That brings an opportunity to pick up European equities and euros on this pullback.

United States: The gift that keeps on giving

Four months out from U.S. election day and the race looks to have taken a major shift. Following what was widely regarded as a disappointing showing for President Biden during the Presidential debate on June 27^th, he looked to turn things around with an ABC interview last week. Despite a seemingly stronger performance there, it did little to quell doubts about his future.

While White House officials have not indicated that Biden will drop out of the race (read here for the rundown on candidate replacement procedures), betting markets are now favoring Kamala Harris over Biden in the election bid. These betting markets are retail-oriented and do not represent very large dollars, but are interesting as a read of sentiment.