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David Le Cornu, head of discretionary, Jersey, and Jamie Mourant, senior portfolio manager, take a look at the issue
THIS year will be noted as the year of the political circus.
At least 64 out of the 195 recognised countries in the world are scheduled to hold elections. These countries represent a populace of circa four billion people, so (excuse the imperfect maths) roughly half of the world gets a vote and, in theory, can influence the shape of their country’s economic policy and international relations for the next four years or so. While not all votes are equal (can a vote in Russia or Myanmar ever be a vote for change?) the potential for change is significant.
According to the World Happiness Report 2024 (a long but insightful read), the world is not a very happy place.
While an oversimplification, unhappy voters are more likely to vote for change. This means that while the narrative and policy will differ from country to country, the thrust of government policy is likely to be about making life easier for those with lower incomes. This will be accompanied by nationalistic overtones, making it clear that governments are placing their own citizens’ interests first and foremost in their policies.
This has left us wondering whether we should be losing sleep over the potential for political change to damage the value of our investments in 2024.
America is the world’s largest economy (2022 American GDP is still 40% larger than China) and American companies represent two-thirds of the value of global equity markets, so America tends to be key in determining whether it’s a good or bad year for investors.
In America, Donald Trump has managed to post the $175m bail bond in his civil fraud case and is promising to bring fireworks on 5 November as he is “betting odds” favourite to be elected as the country’s next President. History suggests that it doesn’t matter whether the Orange Republican Trump (shrink government, deport, drill, reshore businesses and levy tariffs on imports) or the Octogenarian Democrat Biden (tax the wealthy, tax business and redistribute) wins.
The awkward truth for presidents is they aren’t as powerful as they think they are. Their term of office is typically four years, which limits the amount of change they can push through. In addition, there are legislative limitations, with the President having to (mostly?) work within the law and with the House of Representatives and the Senate to instigate significant change.
The recovery from Covid has also left many governments in a parlous financial position. The risk of implementation of significant policies in an election year is low, as government hands are mostly tied. Trump and Biden will want to spend their time detailing their plans for the years ahead, shaking hands and kissing babies to secure votes. Therefore, overall, an election year tends to be a year of lots of political noise but little action.
The chart above seems to confirm how unimportant election years are for American investors. It looks at the performance of the S&P500 from 1936 to 2020, focusing upon American presidential election years. While political noise may cause some volatility and dampen overall returns, the normal outcome is a year of positive returns for investors.
If we look through a wider lens, the story seems to be the same. Data from the FTSE World Index between 2001 and 2024 shows there is no significant drawdown in equity markets that can be attributed to an election, despite numerous elections and changes in governments in various countries around the world during this period.
Over the long term, politics seems to have little impact on investor returns, whereas the path of interest rates and inflation, and the entrepreneurial spirit of business leaders, can have a significant impact. If political noise in 2024 delivers bouts of volatility in investment markets, we recommend that you take a step back, consider the wider picture and look for opportunities.
