Global Election Uproar
By David Ruff, Portfolio Manager
Thomas Jefferson supposedly said “A democracy is nothing more than mob rule, where 51 percent of the people may take away the rights of the other 49.” Possibly, but as Winston Churchill stated “…No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government, except for all those other forms that have been tried from time to time.…” Known as the ultimate election year, an estimated two billion voters choose their national leaders in 60 countries around the globe in 2024. This affects roughly half the world’s population. Voters head to the polls in the largest economy: the US; the largest democracy: India; and the largest confederation of associated democracies: the European Union. We’ll highlight some notable recent elections, their likely equity investing impact, and how we’ve positioned our global portfolios in an effort to both navigate the challenges and profit from opportunities.
In emerging markets, at the halfway point of the year, many of these countries experienced flawed elections. Of course, some governments, such as Russia clearly fall into the fake democracy category and their elections are neither fair nor free. But alarmingly, other free or partly free democratic countries saw a troubling rise in election interference. Suppression of political voices, vote rigging, violent protests, and other problems distorted the electoral process. Sadly, armed conflict becomes the method competing groups too frequently choose to solve their political differences. A number of the remaining elections, this year, will no doubt suffer similar issues. Some lament the increased incidence of failing democracies and rise of autocracies worldwide, potentially raising equity risk premiums, and depressing valuations globally. This also applies to developed markets due to larger multinationals having exposure to these jurisdictions. Industries with extensive exposure include semiconductors, electric vehicles, and solar industries to emerging Asia, as well as the oil and mining industries to Africa and South America. Thus, while we have few companies headquartered in countries with more volatile democracies, we still need to monitor these risks for companies with worldwide operations.
In addition to the ubiquitousness of this year’s elections , 2024 may be known as the year of voter discontentment with the status quo. No doubt a consequence of social media’s ability to amplify the public’s dissatisfaction with their current leaders, from South Korea to Poland to Argentina, we’ve seen a high number of incumbents ousted recently. Even where the majority party stayed in place, several lost outright political control. India, for instance, where polls projected increased dominance by Narendra Modi’s Bharatiya Janata Party, the result surprised with the BJP not only losing parliamentary seats but falling well short of the number for a majority. Uncertain about the new coalition dynamics, India’s stock market volatility spiked. We think the new government probably means investors will show less favor to the politically-dependent infrastructure stocks, but this should benefit our India-exposed, consumption-themed companies. In Europe, aftershocks reverberated from the June elections where gains by more extreme parties in Germany, Austria, and, especially, France rattled equity markets. French President Macron called for snap elections, causing a one-day sell-off in equities as investors worried about Marine Le Pen’s perceived budgetary incompetence and her previous calls to leave the EU. However, the far-right leader soothed markets after her statement of respecting institutions, presumably including the EU, as well as her indication she’ll continue to work with the corporate elite for a positive business climate. Overall, right-wing parties gained ground in the European Parliamentary elections, but less than anticipated, and importantly, no single bloc emerged with an outright majority. With little ideological consistency in the various parties, the resulting coalitions make rapid law change difficult, and while this can lead to delay and frustration in enacting reforms, it tends to promote stability in the business environment. We note that in the US, the best performing equity markets historically occur when Congress splits between the parties. We believe the resulting coalitions, with the balance of power near the center, should insure a relatively stable European business environment. Thus, our European equity positions require little adjustment in our opinion.
In Mexico, the public views President Andrés Manuel López Obrador (AMLO) as anti-establishment. His 2018 Presidential election win ended decades of control by the primary parties. In this case, the trend of voter anger toward the incumbent did not hold sway. Viewed as a protégé of AMLO, new president, Claudia Sheinbaum, likely continues along the same ideological path. You may think markets would appreciate this continuity, but investors feared her landslide victory may create a mandate to pursue constitutional changes to fund more ambitious and expensive social programs. While we’re not delighted with this prospect, we believe our Mexico investment themes remain intact. This includes the airport operator OMA and dominant retailer, Wal-Mart de Mexico. OMA benefits from the ongoing near-shoring trend as manufacturing and production move to Mexico from China and other parts of the world; and Walmex continues to gain consumer wallet share through its growing geographical footprint, impressive scale, and advances in omnichannel capability.
In summary, making informed equity decisions includes not just company and industry factors, but also a review of political developments. Newly elected leaders can change the course of a country’s business climate from several angles including taxes, regulation, and trade. This impacts both companies headquartered in the country and companies operating in the country. Even companies with no direct exposure to the region may be impacted through supplier, competitor, or industry trends. We’ve always been reticent to invest in markets where leadership creates a capricious business climate; and we will continue to monitor and hopefully anticipate both risks and opportunities to adjust our equity portfolios accordingly.
The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.