Without a doubt, 2024 is a big year for elections.
Over the course of this year more than 64 countries, plus the EU, are heading to the polls. These include the world’s largest economy – the USA – and the world’s largest democracy – India – and some will surely close in surprise results.
The prospect of any election in any country brings with it an inherent unpredictability, particularly if new parties come into power. Any changes in political leadership increase the chance of new policies or regimes, raising concerns among investors about the implications for their portfolios.
At the moment, specifically, the polarising nature of so many upcoming elections is an obvious cause for worry. Most notably, with Donald Trump poised to run against Joe Biden in the US presidential election, there is potential for wide-reaching implications on both a national and international stage.
For instance, should Trump win – a man not known for his delicate diplomacy – already heightened geopolitical tensions could escalate further. According to his recent comments, he would want to tax all Chinese goods entering America at 60 per cent, which would likely result in more withdrawals of foreign capital from the country.
Zoning in on what is happening in the economy is a better approach, especially when used in tandem with a long-term view. Domestically, Trump has claimed he would want to replace Jerome Powell, chairman of the Federal Reserve, which could act as a destabilising factor closer to the election, especially for bond markets.
More generally, governments have the capacity to shape policies that can materially alter business decisions, impacting how corporations and organisations function. The allocation of public funds by political parties is another element capable of shaping the economic backdrop.
Election outcomes could, then, affect companies both positively and negatively.
Investors may therefore try to anticipate election results to get ahead of the curve. But is that the best approach? We believe that it is always important to keep eyes fixed on the long term.
With notable exceptions aside – namely Putin’s recent landslide victory in the Russian presidential elections – accurately predicting election outcomes is extremely complex, if not impossible to achieve consistently.
Instead, while politics should be a consideration throughout investment decisions, they should by no means be the sole focus for investors. Politicians may talk a great deal about what they say they will do, but in reality, very few radical changes are ever made.
In the US, only approximately 50 per cent of all legislation promised to the electorate is actually passed.
Moreover, staying with the US as an example, history has shown that there is no consistent pattern between the party in power and growth in gross domestic product or returns on the US stock market. Economic factors tend to be bigger drivers of returns.
For instance, looking back at the year 2000, another election year, returns were driven by the tech bubble. Or, in 2008, the driving factor was the global financial crisis, while 2020 was dominated by Covid, not who won the presidential election.
With elections being incredibly difficult to predict, positioning portfolios on assumed election outcomes is a risky strategy. Even in the UK, making investment decisions based on Labour looking like the likely winner remains precarious.
Zoning in on what is happening in the economy is a better approach, especially when used in tandem with a long-term view.
It is essential to maintain a long-term investment horizon for precisely this reason.
In doing so and by avoiding the temptation of being distracted by shorter-term events, it means that portfolios can be positioned to improve the likelihood that they will perform in a broad range of economic conditions, irrespective of a government’s leaning or the leadership style of a president or prime minister.
While remaining focused on the long term, investors can be well-served by applying a more nimble overlay to portfolios, with the flexibility to implement tactical tilts to a longer-term strategic asset allocation.
This enables them to be reactive to election results when they happen, if needed. Waiting for results means decisions can be made based on the implications of specific policies without speculating on political winners.
Furthermore, by maintaining structural diversification within portfolios, investors can avoid being overexposed to just one region or sector, with the potential risks that brings.
Should an election outcome cause upset in a country, overall performance should not be adversely affected.
We would also advocate investing in quality. With the prospect of political uncertainty and instability, investing in quality is key as high-quality companies are the ones that are frequently better placed to tolerate trickier economic climates.
When taken as a whole, by embracing an investment philosophy along these lines, portfolios can be designed to weather the instability an election can bring. Or, in the case of 2024, 64 elections.
Mark Harries is chief investment officer at Square Mile Investment Consulting and Research
