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#Investments — 19.10.2017

Equity Markets: the 2018 Political Agenda

Guillaume Duchesne

An eventful electoral calendar awaits in 2018, particularly among emerging markets.

Financial markets are highly sensitive to the electoral cycle. We have experienced this phenomenon several times over the past eighteen months, with the unpredictable outcome of the US election in November 2016, followed by fears over the Dutch legislative elections and the French presidential campaign in the spring of 2017. Earlier in 2016, the UK Brexit referendum was another major political upset. In all of these cases, the uncertain outcome of the ballot impacted the markets. Forex rates were volatile, while interest rates and stock markets fluctuated amid sector rotation. The German legislative elections this September, which were considered less risky, had relatively little impact on the markets. Post electoral incertitude has crept in however, notably over the formation of a future coalition.

Although the political cycle therefore often triggers market turbulence, incurring risks for investors, it also creates opportunities. There is a relatively clear correlation between politics and the markets. Policies adopted by the government of a country shape its organisation and play a vital role in economic outlook. As the central banks in developed countries are currently at a crossroads and may soon reduce their support for the economy, political factors may play an even greater role. New governmental policies could now provide a growth relay for the markets. Announcements regarding supplementary expenditure and tax or regulatory measures which may influence consumer spending or investment would effectively help extend the current rally among equity markets.

 

What are the key elections to monitor over the next few quarters?

AMONG DEVELOPED COUNTRIES...

Japan: Legislative elections are being held early on 22 October 2017. Prime Minister Abe hopes to obtain greater leeway and buy more time. The continuation of the reforms and economic support known as Abenomics will hinge on the result of the ballot.

Italy: The stakes of the forthcoming legislative elections scheduled for Spring 2018 at the latest extend beyond the Italian borders. These elections will be decisive for further restructuring in the Italian banking sector and also for reforms within the European Union, through tighter coordination between member states.

US: The mid-term legislative elections in November 2018 will be a major test for President Trump who is keen to score political successes before this date in order to maintain his majority in Congress.


...AND EMERGING MARKETS

China: Although there are effectively no democratic elections in China, most of the politburo, the supreme ruling body, will be renewed following the 19th national Communist Party congress in October 2017. This represents a major event, as the new committee will set major economic domestic policies, which are currently undergoing significant changes.

Russia: Presidential elections are scheduled for March 2018. The Russian economy is recovering from a deep recession and has been boosted by the rally in the oil price, driving the national stock market higher over the past few quarters.

Mexico: The Mexican legislative assemblies will be renewed in July 2018. Mexico will also elect its president. Domestic economic performances have been lacklustre over the past few quarters, with greater volatility in the national currency and equities market. Mexico has entered into a more challenging period, notably due to the deterioration in diplomatic relations with the US, its main trade partner. The choice of political leader is therefore crucial for future negotiations.

Brazil: Presidential elections will be held in October 2018. The Brazilian stock market has staged a sharp rally over the past few years due to a combination of favourable factors, notably the increase commodities prices, an accommodating monetary policy and reforms implemented by the government despite the challenging political climate. The continuation of these reforms hinges on the result of the elections, with the anticipated results remaining inconclusive.
 

The eventful political agenda in 2018 will probably harbour some unexpected results. Investors should therefore remain vigilant ahead of all of the forthcoming election deadlines.