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Bulls, bears and ballot boxes
US, UK, India, Japan will hold elections with possible policy changes affecting markets
Fabiana Fedeli 21 Apr 2024

In 2024, more voters than ever in history are expected to head to the polls in national (or transnational, in the case of the EU Parliament) elections. A total of 91 countries and close to half of the world’s population.

There has been a lot of talk in the media and among industry pundits about the ensuing ‘heightened’ geopolitical risk. Geopolitical risks have indeed increased, but not everywhere, and certainly not uniformly. Let’s not forget that not all geopolitical events affect financial markets. To do so, they have to have a meaningful implication on the economy or economies that drive those markets.

Otherwise, any resulting volatility becomes an opportunity for active investors to buy at a better price. Take the initial negative equity market reactions to the Brexit referendum or Trump’s victory in 2016 – which led to shorter-term, tactical investment opportunities. In the US, historical data shows that elections have hardly altered the medium-term direction of travel for domestic financial assets.

Policy changes

Meaningful policy changes following elections may have a much longer-lasting impact, although the market performance may not be as straightforward and depend on more circumstances than just domestic policy. For example, the election of Narendra Modi to Prime Minister in May 2014 was arguably the trigger for a series of unprecedented policies that enhanced India’s longer-term economic prospects.

The country’s equity market has performed strongly since then and yet not as strongly as in the ten years prior, when policies were considered far less business and economy friendly. India’s Sensex was up 14% annualised in the 10 years preceding Modi’s election, versus 8% in the almost ten years following Modi’s first election, outperforming the MSCI All Country World Index by 8% and 2% respectively.

And as always, the devil is in the detail: some of the elections could impact specific areas of the market and be less meaningful for others. One area that has been much discussed and seen as a clear loser from a Trump victory in the US, is sustainability and investments in a low-carbon future. Current valuations of many companies in this area reflect such uncertainty.

United States

President Biden has embraced government intervention and the Paris Climate Agreement with the Inflation Reduction Act (IRA) providing approximately US$400 billion in clean energy and climate financing. On the other hand, Donald Trump has stated he will roll back the IRA if he wins.

It is worth noting, the IRA was written into the US tax code over a 10-year period. In order to reverse the law, it will require both houses of Congress and the president to be on side. And even within the IRA, there is one area of bipartisan support, which is improvements to the US grid infrastructure.

The other area that is often debated in connection with the US elections is healthcare. After an annus horribilis in 2023, healthcare has seen somewhat better performance so far in 2024 – unusually for an election year.

This is, in part, because the Democratic Party has already acted. The IRA includes a provision that over time will limit drug price rises, reduce patient out-of-pocket spend and cut prices for Medicare pharmaceuticals over a nine- to 13-year period.

This is not to say that something else could not come out of left field when it comes to healthcare reform. Biden has suggested that Medicare could ultimately see prices negotiated for 50 drugs per year, rather than only the 20 provided for in current legislation, and apply further caps on out-of-pocket spend.

At his end, Trump has mentioned the reissuing of an executive order regarding ‘Most Favoured Nation’ drug pricing. That is, the US pays the same price as major trading partners. This would be bad news for the sector as net European Union prices are currently 50% of those realized by manufacturers selling into the US.

While the policies above are far from certain, they all bring risks that we need to consider when making our portfolio choices, and measure against the valuations and earnings growth prospects of healthcare companies.

As one of our portfolio managers points out, the most exciting opportunities to emerge in the US are likely to be in areas that neither candidate seems to be talking about, such as the healthcare insurance sector.

United Kingdom

An election that appears to bring a very different potential outcome for markets is the UK General Election. A Labour win, which is currently the most expected scenario, appears to be met by market participants and the business community with a dose of optimism.

The opposition Labour Party has presented itself as more business friendly than in the past, providing investors with the hope of a period of stability in UK politics that has been missing since 2016.

As another one of our portfolio managers puts it, we could look back in 18 months’ time and point to the elections as a catalyst for change in investor sentiment, precisely because it means limited change. Importantly, we are likely to see policy agreement between both sides of the UK political spectrum on continued spending on the electricity grid, critical infrastructure and national defence.

Of course, with 75% of revenues of the UK equity market coming from overseas, the outcome of US elections and their policy implications are just as important for UK Plc.

India

Asia will also have its share of elections. Between 19 April and 1 June this year, India will hold general elections. Prime Minister Modi’s incumbent ruling Bharatiya Janata Party (BJP) is widely expected to win and Modi to be re-elected for a third term. The victory is largely discounted by markets and a different outcome would potentially trigger very poor market performance.

While political stability looks likely, the policy direction is likely to take a different turn. India has doubled its deficit through the Covid years and is now looking to remove such stimulus. The minister of finance, Nirmala Sitharaman, has already announced a fiscal consolidation. This could affect the growth trajectory and valuation upside of some Indian corporates that have benefited from the fiscal largesse.

Japan

A less discussed set of elections will take place in Japan in late April. Prime Minister Kishida’s administration’s approval-rating is significantly low at around 20% to 25%. If Kishida’s party loses the lower house by-elections in late April, we expect to see calls for his resignation emerging.

While there is uncertainty, we don’t believe this will derail the positive momentum in the Japanese equity market, which is underpinned by corporate reform, balance-sheet improvement, productivity growth and earnings upside.

Volatility

For Asia, and China in particular, market volatility is likely to come from the US elections. Some of Donald Trump’s pledges on increased tariffs on Chinese imports will mean that Chinese companies will be vulnerable to headlines tied to a Trump victory.

Arguably, some of this is already discounted in the depressed valuations of the Chinese market, and the dependency of China Inc. on the US has been on a downward trend – with the US accounting for 17.6% of Chinese exports in 2023 versus 19.3% five years ago. As always, we will need to follow the news flow and make a clear distinction between companies that may be affected and companies that should not.

And, while all of the above looks at the short- to medium-term impact of elections, one longer-term effect is looming. Biden and Trump both seem inclined to keep the US on a path of fiscal largesse and elevated debt issuance.

While in the near term this is unlikely to challenge the US dollar’s status as the international reserve currency, and the US market as the ‘haven’ of last resort – allowing it to enjoy lower debt servicing costs than it would have to incur otherwise – markets are increasingly asking questions about the sustainability of the country’s fiscal trajectory.

Until now, historical data shows no clear relationship between public debt levels and yields on US treasuries but, as we have learned from history, nothing should ever be taken for granted.

Fabiana Fedeli is the chief investment officer for equities, multi-assets and sustainability at M&G Investments.

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