It has become commonplace for fund managers to suggest that politics does not matter very much for financial markets. It is just ‘noise’.
However, the experience of the past few weeks has suggested otherwise, as the French elections have destabilised financial markets. There has been further volatility in recent days due to fears about the US economy.
Should the impact of elections worry investors ahead of the US election in November?
It is true that, for the most part, elections usually do not move the dial for financial markets, barring a bit of short-term volatility. James Thomson, Rathbone Global Opportunities fund manager, sums up the view of many fund managers: “We are relatively agnostic of the political backdrop as long as we avoid the extreme ends of the political spectrum.”
This has been clear during the recent UK election, where the renewed stability ushered in by a comprehensive victory for the Labour party creates a benign backdrop, but little else.
Thomson says: “Where we own UK companies, we invest based on the merit of the business rather than making a top-down call on the UK. Our exposure to the UK economy remains small in relation to the fund, but we expect the outcome of the election to be supportive of our UK-listed businesses.”
It is a similar picture for many emerging markets. Once seen as most vulnerable to political disruption, most elections this year have passed without significant incident.
The Indian election caused a small wobble in financial markets, but they have regained their equilibrium as they have recognised that the Modi agenda remains largely in tact.
The M&G emerging markets team commented: “Despite initial concerns around heightened volatility as voting deadlines loom in major developed and emerging markets, financial markets, thus far, have generally kept their calm with almost half of the year behind us.
"Amidst this, we believe the political shifts brought on by recent ballots, however subtle, could open up new prospects for investors in emerging markets."
When it matters
However, there are times when politics and economics collide, particularly in countries where government debt is problematically high. For many major economies, government finances are on a knife-edge, and these countries may be one Liz Truss moment away from a financial crisis.
This is what happened in France. France’s debt to GDP currently sits at 112 per cent, and repeated attempts to bring it down have not succeeded. The fear for financial markets is not that a far right government comes to power, but that political sclerosis makes tackling the deficit even less likely.
John Chatfeild-Roberts, investment manager on the Jupiter Merlin Portfolio range, explains the problem: “Bond market investors breathed a sigh of relief about the National Rally losing (its intended fiscal plans set alarm bells clanging in Brussels).
