Author’s note: Fisher Investments’ political commentary is intentionally nonpartisan. Fisher Investments favors no politician nor any political party and assesses events solely for their potential economic or market impact.
This year has just begun, yet already it is shaping up to be much quieter than 2020 on one front: global politics. While politics is just one factor of three broad drivers Fisher Investments thinks influence equity markets (economics and sentiment being the other two), the relative relief investors should feel this year after a tumultuous 2020 should help sentiment improve further, in our view, and the relatively benign political backdrop should be positive for stocks globally.
Investors had to contend with a lot on the political front throughout 2020. The US election dominated the year, from a Democratic primary campaign with two dozen challengers to the hard-fought general election and its chaotic aftermath. It even lingered into 2021’s opening days, thanks to the two Georgia Senate runoffs. On the rare occasion when the chatter quieted, there was plenty of Brexit haranguing to fill the void, as the UK and EU ran trade talks down to the wire. Add in the tumult in Hong Kong and all the backlash against countless governments over their responses to the pandemic, and there was nary a calm moment. But now, things are quieting down. While the Democrats control the House, their edge is the party’s smallest since 1900. Additionally, the Senate is split with Vice President Kamala Harris casting any tiebreaking votes, cementing two years of gridlock (and a lot of infighting). Brexit is going smoothly overall after the UK and EU inked a last-minute trade deal. Hong Kong remains a hot spot, but, in the US and Europe at least, relative calm is settling in.
Europe’s political calendar isn’t empty, but the events on the schedule are—at least from a global perspective—lower-stakes and less contentious than the all-consuming Brexit debate. For example, the Netherlands’ next general election, which takes place on March 17, doesn’t look likely to yield radical change even if the populist Freedom Party maintains its strong showing in the polls. The current government is a hodge-podge of center-right parties, led by Prime Minister Mark Rutte, with a minority in Parliament. Whether or not Rutte returns, the next government will almost surely be as fractious as the present one, with multiple parties and plenty of internal disagreements. That likely extends gridlock. The other main European contest, Germany’s federal election, presently looks set to be similarly underwhelming. Chancellor Angela Merkel isn’t running for re-election, and her hand-picked successor has already stepped down as leader of her Christian Democratic Union (CDU) party. No one else in the party has her clout, popularity or name recognition. Meanwhile, the opposition Social Democratic Party (which is junior partner in Merkel’s coalition government) is still trying to heal from its 2017 rout. Populists will probably make some noise, but investors are well used to that in Europe at this point. Stocks have seen this movie before.
This year isn’t free of political uncertainty, but the pockets where it exists are small—like Israel, which is set for its fourth election in under two years in March. But Israel is just 0.2% of MSCI World Index market capitalization—too small for uncertainty there to move the needle. Questions also surround Scotland’s election, which could resurrect the push for a second Scottish independence referendum if the Scottish National Party regains its majority in the devolved parliament. Will-they-or-won’t-they chatter there could cloud sentiment for a while, which we think is worth watching, but, even if they do hold another referendum, the journey to that point is long—and a vote to secede from the UK is far from a foregone conclusion. The last independence referendum was a long-term part of the UK’s political backdrop, and we suspect the same would hold true in a sequel.
The one outlier on the political calendar—a high-stakes event likely to stir emotion greatly—is Hong Kong. Its legislative election was originally scheduled for September 2020, but current leader Carrie Lam postponed it a year, citing the pandemic. Even though it is several months out, emotions are already running hot due to the arrest and jailing of some pro-democracy advocates. Unrest in the run-up to the vote wouldn’t surprise, and the contest itself could even be postponed again depending on how the pandemic and vaccine drive play out. That, as well as the election’s outcome, is impossible to know now, which may extend uncertainty over Hong Kong stocks. The direct effects seem limited, as Hong Kong only amounts to 1% of MSCI World Index market capitalization (and politics are but one driver). However, considering China’s interference in the city’s politics could be a touchpoint in relations between China and the West, the indirect economic effects could be bigger. Yet this isn’t a change from the past few years’ status quo, so we suspect it would take significant escalation for this to present a material headwind for global markets.
Political uncertainty is never absent. But even with the lingering pockets, the world overall appears set for a relatively calm 2021. Wild cards are always possible, as snap elections could occur. But from what we can see today, on the political front at least, for now, the backdrop looks benign—favorable for stocks, in Fisher Investments’ view.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: FactSet, as of 12/28/2020. Source: FactSet, as of 12/28/2020.
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