Politics around the globe are expected to play a significant role in how markets perform for the remainder of the year, with multiple elections impacting investor sentiment.
Speaking to InvestorDaily, AMP’s chief economist, Shane Oliver, said market volatility is sure to remain for the remainder of the year, which has been dubbed the biggest election year in history.
“The reality is, politics will have a bigger impact this year on markets than was probably the case last year, with so many elections going on,” Oliver said.
“We’ve already seen that in Europe, with the EU elections, and the situation in France. Odds are, we’ll see that in the US this year as investors increasingly focus on the potential downsides of some of Trump’s policies.
“So, in that sense, politics will probably cause more of a volatile ride.”
Just this week, the world learnt that the UK has a new prime minister – Labour Party’s Keir Starmer – while the French election result shocked, sending the country into fairly unknown territory.
On the UK situation, Oliver opined that it’s unlikely to pose any major risks for the economy, meanwhile, France, he noted, looks to be a bit more complicated.
“The UK will have a stable government whereas the previous conservative government was a bit unstable,” Oliver said, adding that he doesn’t expect any radical policy changes from the newly elected Labour leader.
“The first policies [Keir Starmer] have been taken fairly positively, so I don’t really see major risks from the change in government in the UK, and I don’t see a major impact from it, certainly not in terms of Australia.”
Moreover, he said, UK markets have been holding up fairly well, with the FTSE 100 Index down around 1 per cent over the month to 10 July 2024.
Meanwhile, in France “the parliamentary elections have ushered in a period of instability” and shaky market performance.
“Though it’s not quite as bad as might’ve been feared a week ago, when everyone was talking about a swing to the right and the possibility the far-right National Rally would be able to form a government,” Oliver admitted. “In fact, the outcome was very different to that – the far-right came third – and you’ve ended up with the hung Parliament scenario.”
However, Oliver cautioned that this is far from a good scenario and could potentially result in staggered progress on the economic front, and a lengthy period of political instability.
Ultimately, though, it appears “Macron’s gamble paid off”, and the results were not as severe as had been forecast.
“Conflict with the European Commission is likely to be minimal and you could argue, to some degree, that Macron’s gamble paid off, in the sense that he lost less seats than feared, and his grouping came in second and holds the balance of power in Parliament. It’s not as bad as it could have been, but it still ushers in a period of uncertainty,” Oliver said.
Amid this uncertainty, the chief economist conceded investors are likely to be on the lookout for aftershocks in the eurozone, in the near-term.
But while markets have dipped, spreads between French and German bond yields have reversed.
Namely, in the immediate aftermath of the French President’s election announcement in June, the gap between the French and German 10-year bond yields increased by 29 basis points.
At the time, Jim Reid, strategist at Deutsche Bank, said: “For reference, the last time it was this wide in 2017 came just before the first round of the presidential election that year, when Macron came first and set up a run-off in the second round against Marine Le Pen. Then spreads tightened again after Macron’s first-round win, as markets moved to price in a strong likelihood of a Macron presidency”.
However, Oliver noted roughly half of this “blowout” has been reversed since the election took place.
“Still, investors are nervous because half of that spread blowout remains in place, so I think it’s fairly messy in France,” he said.
All eyes on the US
But while recent political events in the eurozone are “not great”, Oliver said they’re “not disastrous” either, and paint a healthier picture than the crisis seen a decade ago.
As such, he believes the current predicament doesn’t warrant a re-evaluation of one’s investment strategy.
“Besides, where would you go?” he asked.
“Would you go to the US? Well, the US has election issues as well, perhaps bigger ones if Trump wins.
“If you take your money out of Europe, if you’ve got to stay international, you’ve got to put some of it in the US, which has its own risks politically.”
Oliver explained that some of Donald Trump’s policies are likely to be inflationary. Moreover, there are other concerns should Trump emerge victorious, such as his promise to increase tariffs, particularly on China, alongside discussions hinting at reduced independence for the US Federal Reserve.
While investors are keeping a close eye on US markets ahead of the election, particularly as concerns grow with regards to incumbent Joe Biden’s candidacy, Oliver said confusion is the prevailing sentiment among investors viewing the world’s largest economy.
However, he noted that simmering geopolitical risks also come with investment opportunities.
“I don’t think geopolitical events are very easy to forecast, some of them seem obvious in hindsight, the issues in France have been negative but it’s probably been messier than many would have expected. It’s not always clear,” he said.
“Given the difficulty in timing geopolitical events, it’s probably best to use them as opportunities rather than think you can try to forecast them.
“In a general sense, you could argue, there is this geopolitical risk this year, so therefore you should be a bit more cautious than you otherwise would have been, but apart from that, I’d say it’s a case of waiting to see what the impact has been, and then reacting if it turns up opportunities.”
Oliver added: “If US shares fall as a result of worries about the US election, odds are it will provide opportunities for investors.”
