Politics and markets: What risks do key upcoming elections pose?

 
Harriet Green
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Far less of a close-run thing than most had expected, the Greek elections last month confounded predictions. Syriza, led by Alexis Tsipras, bagged 7 per cent more of the vote than conservative party New Democracy – with which it had been neck-andneck in opinion polls. Now, with a more centrist hard-left party at the helm, and bailout reforms already agreed, many analysts are saying that we can forget about further Greek ructions or the re-introduction of the drachma.

“We are now looking at a stabilisation in Greece,” says Diego Iscaro, senior economist at IHS. “Tsipras is trying to send a signal to markets that his administration is willing to co-operate with creditors, and we’ve now got a majority of pro-bailout parties in parliament. Things still don’t look that good, but they look a lot better than they did two months ago.”

But Syriza’s easier-than-expected win is raising questions about poll uncertainty – particularly at a time when markets are questioning the risks that the surge of populist support across Europe poses. And while 2017 is set to be a bumper election year, with France, the Netherlands and Germany all seeing votes of one form or another, in the nearer term, other key European countries are going to the polls, along with Turkey, possibly Brazil and, of course, the US. So what do the impending elections across the world mean for markets?

TURKEY 1 NOV 2015

The latest poll, by pollster ORC between 7-9 August, had the ruling AK Party (AKP) winning 44.1 per cent – not enough to secure an outright majority. The Turkish stock market has had a torrid time in the past 12 months, down over 22 per cent. That means “forming a government is paramount to steady the ship,” says Darius McDermott, managing director at Chelsea Financial Services.

A coalition – which is currently the most likely scenario – could be viewed as unstable by markets, but Ege Seckin, political risk analyst and Turkey specialist at IHS, says that it is the outcome favoured by business circles in Turkey, because the Peoples' Democratic Party (HDP) and Nationalist Movement Party (MHP) both have internationally respected technocracts, like former minister Kemal Dervis, who would likely become involved in economic matters. “Under a coalition government, contrary to fears, Turkey would likely stay fiscally prudent and potentially address some of the economic reforms the country desperately needs.”

While a majority will see a positive reaction from markets, “in the long term, the problems under the current regime will continue”, says Seckin. It’s unlikely, he continues, that the AKP will address the necessary structural economic reforms that the country needs for a stronger growth trajectory.

The smallest political instability will see investors react. The Turkish lira is down 35 per cent against the dollar year-on-year, which has put pressure on Turkish equities, which are down 18 per cent from their peak in mid-February. “The reason we see such volatility in the exchange rate is that the country has a humongous current account deficit,” says Seckin. This has just worsened over the years, meaning the economy depends on short-term inflows of capital. This month, the central bank left the benchmark one-week repo rate unchanged at 7.5 per cent for the seventh month running. And it’s the same story in industry, a sector dependent on imported materials and semi-finished products. Several analysts warn that lack of action will have serious consequences for growth.

IHS’s baseline prediction, based on current polls, is that the ruling AK Party, led by Recep Tayyip Erdogan, is unlikely to get a majority – and that’s if an election is held. “It could well be postponed,” says Seckin. “And if Kurdish separatist fighting continues, there will be legitimate grounds for doing so.”

SPAIN 20 DEC 2015

Following Syriza’s rise to power in Greece on a wave of anti-austerity sentiment, many had feared that Spain’s populist equivalent Podemos could do the same in the country’s elections this December. But a survey by newspaper Metroscopia between 7-11 September showed the party far behind. The Socialists (PSOE) were in the lead, with 24.6 per cent of the vote, and the incumbent ruling People’s Party (PP) close behind, with 23.4 per cent.

“This could be the more interesting of the European elections,” says McDermott. With traditional parties taking a battering in local elections in May, left-wing party Podemos had surged in opinion polls. But the reluctant acceptance of economic reforms by fellow anti-austerity party Syriza has dented Podemos’s popularity. “Markets are now expecting a victory for the current government, so there’s not a lot of market stress,” says Diego Iscaro, senior economist at IHS. It’d be very difficult for Podemos to get anything near a majority in December, he goes on – if anything, just because of the way the Spanish voting system works.

And although the potential of a coalition outcome in December could wobble markets, prospects for the Spanish economy are greatly improving. “A weaker euro and centre-right Prime Minister Mariano Rajoy’s embrace of structural reforms has seen Spain jump towards the top of the Eurozone growth league, with 3.1 per cent year-on-year growth in the second quarter of 2015,” says Simon French, chief economist at Panmure Gordon.

Sidelining popular policies, Rajoy has stuck to a series of reforms to turn around the economy. Back in July, for instance, he fast-tracked a planned income tax cut. And more money in the pockets of Spaniards is helping to boost its international firms. Two weeks ago, Inditex, owner of fashion chain Zara, announced that half-year profits had risen by 26 per cent from a year earlier, thanks to a revival on Spanish high streets.

Furthermore, many analysts think the elections are already fully priced into the country’s debt markets. According to Bloomberg World Bond Indexes, Spanish bonds have lost 0.6 per cent this year to 4 September, making them look cheap compared to Italian counterparts. Last year, Spanish sovereign debt returned almost 17 per cent.

UNITED STATES 8 NOV 2016

The latest polls for the presidential primaries, from CNN and ORC last week, showed a slide for Republican favourite Donald Trump, as Texan businesswoman Carly Fiorina shot to second place, and he slipped from 32 per cent to 24 per cent. On the Democrat side of things, Hillary Clinton’s lead over Bernie Sanders has widened – she’s now polling at 42 per cent, while he’s at 24 per cent.

Usually, US equities enjoy a relief rally following an election cycle – with an average rebound of 11 per cent the following year, according to data from Goldman Sachs – but “history shows that neither party is ‘best’ for markets,” says McDermott. In an election note last month, Goldman analysts said that, on a straight calendar year basis, Democrats have a clear edge in S&P 500 performance. But the statistical relationship between party and market performance is “unclear”, and making investments based on an election cycle can only have “limited benefits”.

What markets really care about is the Fed’s handling of interest rates. “The upcoming election may encourage the Fed to take action sooner in order to avoid monetary policy becoming an election issue,” says Colin Cieszynski, chief market strategist at CMC Markets.

Yet despite the limited market impact, candidate proclamations in the run-up to the elections can wipe billions off certain sectors. Last month, Clinton pledged to take on “outrageous” price-gouging in the biotech industry. Out of 144 firms on the Nasdaq biotech index, shares in 142 fell on the statement. But the sell-off was beyond what would be expected, says Cieszynski, and probably just contributed to the fact that “the sector has been due for a correction”.

The US’s overall economic picture “remains strong” says French, who points out that the vast amounts spent on primary campaigns and the election proper will “act as a significant tailwind to growth.” He adds that the “continued success of Obamacare represents a significant structural reform, which will begin to be reflected in productivity.” And an eye will also be kept on the issue of migration – particularly with Trump in the offing. A shift to tighter policy next year will serve only to push up wages and stymie economic activity.


And what about less significant elections this year and next?

BRAZIL - DATE TBC
One to watch out for, if the country is forced to call another election, says McDermott. Government corruption and Operation Car Wash – the name of the investigation into energy firm Petrobras – along with high inflation and falling commodity prices (Brazil is a commodity exporter) have ravaged the country’s stock market. “Brazil also has a large current account deficit, so will continue to suffer as the dollar strengthens.”

IRELAND - 8 APRIL 2016
Ireland’s stock market is up 22 per cent this year, and 2015 growth is forecast at 6 per cent, confirming Ireland as “the poster child for austerity and crisis resolution,” says Panmure Gordon’s Simon French. That said, recent real estate price acceleration brings “uncomfortable precedents that will need to be managed by the new government”.

RUSSIA - 18 SEPT 2016
Russia’s legislative elections (the presidential one isn’t until 2018) will be “dominated by the future of oil and gas prices,” French says. Inflation is at 15.8 per cent and GDP growth is falling by 4.6 per cent year-on-year. Unfortunately, the global “lower for longer” interest rates stance will delay the recovery in prices that the Russian economy needs, he adds.

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