As half the world’s population goes to the votes this year, investors should be thinking about the likely impact on portfolios, according to a recent note by Niall O’Sullivan, chief investment officer of multi-asset strategies for EMEA, and Nicole Vettise, client portfolio manager at Neuberger Berman.
Vettise said: “Voters representing around half of the world’s GDP and half its adult population are likely going to the polls this year.
“When elections are that widespread, they are not all going to be in sleepy backwaters where nothing much is happening.”
The US, the UK, Egypt, India, Pakistan, South Africa and Mexico are among the countries holding major elections.
There will also be votes in Iran, which saw serious civil unrest in 2022 and 2023, and is now at the heart of renewed Middle Eastern tensions.
In the European Parliament, right-wing populists look set to make big gains, potentially complicating policymaking from net zero and immigration to budget-setting and Ukraine.
This, the note said, hinted at one reason why elections could matter more for the economy and markets today than they did 20 or 30 years ago.
Vettise added: “We have moved from the unipolar moment of the 1990s into a more fractious multi-polar era. But in addition, substantial and once disinflationary forces – advancing technology, demographics, global trade and energy generation – are increasingly mainstream political flashpoints that may be turning inflationary.
“How far should we limit the power of big tech? How do we balance the economic needs of the old and the young? What level of protectionism and security do we need in our supply chains?
“How fast can we decarbonise our economies? It seems likely that, at least in the last three, the pressures remain inflationary.”
Looking at the US, since the 1940s the equity market has reacted most favourably to a Republican 'clean sweep' of the presidency and Congress, but least favourably to a Republican president facing a divided legislature.
Vettise said: “Investors appear to prefer a Democrat rather than a Republican president to be paired with a divided or opposing Congress."
She added: “A more consistent observation is that US equities do a little less well and below long-term trend, on average, during US election years. Diversification and defensiveness has tended to pay off.
Having done a straw poll of investment managers, Chris Metcalfe, chief investment officer at asset manager IBOSS, part of Kingswood Group, said that concerning the US, while the managers were not unanimously fans of Donald Trump's methods of governing, he was seen as being relatively market-friendly.
A second term for Joe Biden would likely bring more of the same policies as his first, but at some point, the massive US debt situation would mean spending must be reined in. On tariffs, some managers commented that Biden and Trump were not that far apart on policy.
With the upcoming UK election appearing to be less contentious than the previous one, if Labour won, UK managers had fewer concerns about a Keir Starmer-led government compared to one led by Jeremy Corbyn.
Metcalfe said: "Although a labour win is widely predicted this time, these same managers have fewer concerns about any market impact overall. That said, whoever wins the election will produce some new winners and losers. Still, the critical point is that the election result will probably be less market-moving than the potential outcome of the previous one."
He added: "Our outlook is very much centred around diversification. It is worth remembering that investor returns can come in short bursts, and markets rarely rise uninterrupted.
"We feel now more than ever that holding a diverse portfolio - inclusive of cash - is essential to ensure that clients’ portfolios maintain exposure to areas of opportunity, insulate them from some of the worst market moves and have enough dry powder to take advantage of new opportunities as they arise."
Neuberger Berman's Vettise said: “On the whole, investors don’t appear to mind who wins elections, but they dislike the uncertainty and are glad to get them out of the way.
"In particular, close, hard-to-call elections tend to be followed by strong performance as uncertainty is removed – a consideration that may be relevant later in the year."
ima.jacksonobot@ft.com
