Market Musings 021223:
A packed 2024 year of elections

Summary:

• Taiwan is unlikely to become more pro-China overnight

• India: Modi’s BJP likely to be confirmed for another term

• European Parliament: even with gains for the far right, centrist blocs should dominate

• UK: a big challenge for the opposition Labour party to convert their poll lead into a clear majority

• US Presidential election: Trump clearly in the lead v Biden

• Don’t over exaggerate the impact of politics on the global economy, financial markets

Podcast this week:

Death to "higher for longer"

In this podcast Edmund Shing explains what is « Higher for Longer » and why it is now over.

• The context of interest rates and inflation

• The reasons for the recent fall in yields

• Reasons to stay positive on bonds

2024: a big year for elections around the globe

2024 is going to be a very busy year for politics and elections.

I would like to highlight five key elections that are coming up in 2024 which could give us some clues as to trends both for the global economy and for financial markets in the year ahead.

The elections I am thinking about concern:

• Taiwan,

• India,

• The European Union,

• The UK, and

• The US.

Taiwan: Key to US-China tensions?

Starting with Taiwan, we have parliamentary elections early next year (January 13).

At the moment, the leading party is the Democratic People's Party (DPP), which is rather anti-China. It is quite clear that no political party in Taiwan would dare at this point to try to declare outright independence, thus provoking mainland China.

However, the key will be whether there is any sort of rapprochement by the victors of this election with the Chinese Communist Party hierarchy.

At this point, with the DPP in the lead, this seems rather unlikely.

However, note that, aside from this upcoming election, there does seem to be calming of tensions at the moment between the US on the one hand, and Communist China on the other.

The US clearly are thinking about upcoming their own elections in November next year, which we'll talk about more in a minute. The mainland Chinese hierarchy have their own domestic problems to deal with, with regards to stabilising the property market, shoring up faltering domestic consumer confidence and relaunching the economy.

It is perhaps therefore, not the time to be thinking about a military  invasion or otherwise of Taiwan, at least in the short term, even if their longer term strategic objective of reuniting Taiwan with greater China has not changed - in the same way that Macau and Hong Kong were absorbed back into China back in 1997.

More detailed information about this election can be found in this article by the Asia Society Policy Institute.

India: Prime Minister Modi and the BJP to be returned?

Secondly, in India, it is clear that Prime Minister Modi remains extremely popular. It is interesting to note that his popularity exceeds even that of his party, the BJP, which is still the ruling party. Again, it is likely that the parliamentary elections in India will return the BJP and Prime Minister Modi to power.

2019 Indian parliamentary election: BJP dominated

Source: BBC, Election Commission of India

Note that there are 5 key Indian state elections that have just taken place in November. According to the exit polls from these states, the BJP seems to be maintaining a clear lead over other national challengers such as the Congress party.

This 2024 national election will be important because India is a clearly emerging middle power, and a power broker or growing importance between the major powers of the US, China, and Russia.

It seems that the Indians are able to profit from deals with each of these partners although there is long lasting, long standing enmity between India and China.

But for investors in India, an extension of PM Modi’s mandate should be reassuring, as Modi has been largely pro-economy and pro-business. India is certainly not China, but India requires huge ongoing investments in energy and transport infrastructure, not to mention education.

All of this suggests that there is still a long runway ahead for in terms of Indian economic growth, with a relatively youthful 1.4 billion population, unlike the ageing populations in the West and in South Korea, Japan and China.

Europe: Continued lurch to the far right?

Thirdly, the European Union has parliamentary elections for MEPs also approaching in 2024. The key question is whether the far right parties will gain a greater representation in the European Parliament, reflecting the shifts to the right already seen in Sweden, Hungary, Italy, and latterly in the Netherlands.

In my view, this is quite likely to be seen. But whether or not they will hold the balance of power in the European Parliament is certainly another question. It is more likely that the centrist blocs (the centre-right EPP and the centre-left S&D blocs) will retain the largest share of MEPs, judging by the latest EU parliamentary projections.

European Parliament: centre-right EPP and centre-left S&D blocs likely to dominate

Source: Europe Elects, November 2023

The UK: Can Labour maintain their huge poll lead?

Then we can turn to the UK where there have to be elections at some point next year, in my view probably later rather than earlier, given the commanding 19 point lead in the polls for the opposition Labour Party over the ruling Conservatives.

UK Labour Party currently hold a 19% lead on average in polls

Source: Politico poll of polls, November 2023

Remember that in spite of this seemingly commanding lead in the polls, the Labour Party requires a huge swing of 12% from the last election in order to gain even the smallest majority of one MP, i.e. 326 MPs out of the 650 total in the House of Commons.

This 12 point swing would be substantially greater than that achieved by Tony Blair in the 1997 electoral landslide, where he commanded a huge majority and threw out the Conservative Party.

UK general elections since 1918: Conservatives have led more often than not

Source: UK House of Commons Library

Key to a potential 2024 Labour party victory are I think two areas. One which will be easier to achieve, which is retaking seats last in the North of England that were lost when the Tories won their last sweeping victory in 2019, post Brexit.

I think this is very likely given the overwhelming sentiment in the UK that Brexit implementation has been poorly handled.

The greater challenge perhaps is in Scotland, where I believe Labour would need to achieve something like 20 or even 25 MPs out of the 59 available (they only won 2 Scottish seats in 2019), and therefore would need to take a huge share of MPs back from the Scottish Nationalist Party (with 43 currently out of the 59 total).

Now this also may be possible for two reasons Firstly, because the Scottish Nationalist Party in my view, is a lot weaker today than it was under Nicola Sturgeon. The new leader Humza Yousaf seems to be far less visible as a personality than Sturgeon.

Secondly, you may see a wave of tactical voting as Scottish voters may vote for Labour, with the objective of throwing out the longstanding Conservative government. Nevertheless, even despite the huge swings achieved at recent by-elections, this remains a big challenge for the Labour Party.

From an investment point of view, recent pronouncements by the shadow Chancellor Rachel Reeves seem quite pragmatic, seeming to represent a return more to the centre as opposed to more of the far-left pronouncements of the previous Labour opposition under Jeremy Corbyn.

The big one: the November 2024 US Presidential Election

Finally, we have of course the November 2024 presidential election in the US. For now the leading candidates would seem to be on the Republican side, clearly former President Donald Trump, and on the Democrat side, the sitting President Joe Biden.

The problem is simple. Joe Biden does not enjoy a high approval rating today.

President Biden approval rating: only 38%, low for a sitting President

Source: fivethirtyeight.com

This, in spite of what has been up to now a strong economy and very low unemployment, which should in theory boost the sitting President.

Secondly, by next year, he will already be 82 years old, and even if he were to win a second term, by the end of that second term, he would then be 86. Now, he seems very frail today. So I think health and health issues will be uppermost in the minds of US voters.

In addition to that, what is quite impressive is how untouchable Donald Trump seems to be in spite of his legal troubles and all the upcoming trials that we see in Georgia and elsewhere.

Trump leads in 5 key swing states on a head-to-head basis

Source: New York Times, November 5, 2023

Particularly if we look at other Republican candidates who continue to trail Trump by a wide margin, perhaps the only viable alternative candidate for the Republican Party for the more moderate elements of the Republican Party is Nikki Haley.

Trump holds a commanding 60% of the Republican primary vote in the latest polls

Source: fivethirtyeight.com

But this would require other leading challenges such as Ron DeSantis to drop out and switch their allegiance to Nikki Haley in order to provide a credible challenge in the Republican primaries to Donald Trump.

So far, this is not, I would say, a high probability, but it's not zero either.

On the Democrat side, it seems that President Biden is sure to be confirmed as the candidate, unless he were to voluntarily stand aside perhaps for health reasons, then allowing a more youthful and dynamic candidate to take his place - one who would be much more likely to defeat Donald Trump. But so far, this is not in view.

Bear in mind too that for any President to be able to enact sweeping legislative changes including new laws, he/she requires control of both Houses in Congress. There is a good chance that even if Trump were to be elected President next year, that the Republicans would not hold majorities in both the House of Representatives and the Senate, then limiting Trump's room for radical manoeuvre.

However, I would say that even if Donald Trump were to be re-elected, this is not necessarily bad news for financial markets, or indeed for the US economy. Note that the economy performed relatively well under Donald Trump, the first time around.

The Dow Jones Industrial Average returned 56% during the Trump presidency, according to LPL. This represents an annualised gain of 11.8%, which is the best performance for any Republican president since Calvin Coolidge during the roaring 1920's.

Source: LPL Research

Even for the US stock market, upon the news of his victory, it dropped from a grand total of two hours before then rallying. Indeed, under the four years of the Trump presidency, the stock market performed relatively well. In fact, it was one of the better Presidential four year terms in terms of stock market performance.

Concluding remarks

I think what we should conclude here is that: yes, it will be an eventful year for politics and for elections in various countries.

However, the impact on the global economy may ultimately be a lot smaller than one would expect.

Yes, you can expect to see some short term volatility, but in the medium term probably not a great change in direction for the global economy and therefore as well, perhaps not as big an impact as one might fear for the global financial markets.

We should find out in due course…

Have a great week,

Edmund