More democracy, more investment?

One of the risks that major investors consider when selecting a sector, a company, or a region is precisely political risk. Legislative instability is not good for investments because it can create regulations that affect a particular sector, raise the risk of default for the country or its companies, and impose various regulations on dividend payments or on imports and exports. Therefore, from the investment perspective, politics is usually seen as a risk due to its variability.

Although, broadly speaking, the asset manager PIMCO points out that these risks are more harmful in emerging countries than in developed ones. Consequently, politics should be considered more carefully when making investment decisions in regions such as Latin America, Asia, the Middle East, or Africa. However, this does not mean that politics does not impact investment decisions in more developed economies, such as those in Europe or North America.

The U.S. presidential election is probably the most widely followed election in the world. As the world's leading economy in terms of GDP and the largest financial market, it draws significant attention. Various reports show that, historically, there has never been a very significant correlation between the occupant of the White House and market performance. “Elections have often had less impact on markets than voters might assume,” the asset manager Fidelity says.

In fact, data shows that the S&P 500 has risen 9% annually, on average, in years with a Democratic president and a Democratic-majority Congress. In contrast, years with a Republican majority and a Republican president have seen increases of 12.9%. However, the most profitable years throughout history have been those in which Congress has been divided, regardless of whether the president was a Democrat or a Republican. In both cases, the stock market grew by 13.6% or 13.7% on average per year.

Finally, according to Forbes, stocks gained an average of less than 6% in the year preceding a presidential election. In contrast, the average gain was over 8% during non-election years. Bonds tend to offer yields of around 6.5% before a presidential election, compared to 7.5% in a non-election period. 

In Europe, the impact on the markets is more difficult to measure. However, in 2024, besides the formation of a new European Parliament, there will also be national elections in the United Kingdom, which are the two most significant elections from an economic perspective. In addition, Austria, Finland, and Belgium will also be electing new political representatives.

For the European Parliament, the major pending issue is increasing defense spending, alongside promoting sustainable policies. A parliament with a conservative or Christian Democrat majority is likely to favor higher defense spending and be more hesitant about further promoting the green transition. 

However, experts at Deutsche Bank point out that a new mandate for Ursula von der Leyen, which appears to be the most likely scenario, will prioritize two key issues on her political agenda: “competitiveness and strategic autonomy (including defense) and the expansion and implementation of the Green Deal.” In this regard, and considering that the EU is about to set a climate target for 2040, which will serve as another intermediate milestone towards achieving emission neutrality by 2050, sustainability-related legislation will be crucial. Here, sectors affected can range from power companies, the automotive industry, the food sector, and others such as plastics.

In the UK, the election will lead to a new configuration in its relations with the European Union. Currently, Germany and the UK are experiencing tensions due to the sharp increase in tariffs on German vehicles. However, experts predict a victory for the Labour Party, which could lead to improved relations between London and Brussels, which would be positive for the market.

As for emerging markets, UBS considers the elections in Mexico and India to be the two most significant. In Mexico, the most pressing issue appears to be taxation. The Ministry of Finance estimates that in 2024, the public deficit will reach 5.9% of GDP, the highest in more than three decades. Currently, Claudia Sheinbaum seems to be the frontrunner to become Mexico's next president. UBS notes that this would imply “A certain political continuity, but with greater flexibility in key areas. The market would react neutrally.”

Meanwhile, in India, the world's fourth-largest economy, it appears that Narendra Modi will seek a third term in office. This would translate into a continued focus on boosting productivity through economic reforms and turning India into a manufacturing powerhouse, —a continuation of current policies.

The International Monetary Fund has expressed concern about the high levels of debt and deficits in both developed and emerging countries and has called for greater fiscal austerity in a 2024 marked by elections. “Governments must exercise fiscal austerity to preserve the soundness of public finances.”

Additionally, they stress that they expect “a slight fiscal tightening in the medium term, which will not be enough to stabilize public debt in many countries.” Finally, they warn that “without further action, the return of fiscal policy to its pre-pandemic normal state may take years”.