What Trump the maverick and ‘indistinguishable’ UK parties mean for investors in an election year

Republican presidential candidate and former President Donald Trump speaks during an election night watch party at the State Fairgrounds on February 24, 2024
Donald Trump is widely expected to regain the White House - Win McNamee/Getty NA
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Elections due to take place this year threaten to have an unprecedented impact on the financial markets and investors must be on the alert, City professionals say.

Voters representing around half of the world’s economic output and half of its adult population are due to go the polls this year, including here in Britain and in America, India, Pakistan, South Africa and Mexico. There will also be votes in Iran and in the European parliament, where right-wing populists are expected to make big gains.

History suggests that market and economic dynamics have affected short-term investment returns more than the outcomes of elections, but this may be changing.

“We believe elections may matter more for the economy and markets today than they did 20 to 30 years ago,” says Rebekah McMillan of Neuberger Berman, an investment manager.

“We have moved from the ‘unipolar’ world of the 1990s – a world where there was one great power in the form of the US – into a much more fractured, multi-polar era, where there are multiple global powers.”

Elections influence geopolitical and economic stability as well as consumer confidence, so McMillan says a contentious election can lead to both uncertainty and volatility – witness the civil unrest often seen in emerging economies, such as in Bangladesh last year, or even the insurrection at the United States Capitol in Washington DC on Jan 6 2021.

What does this mean for investors? In any election, the potential for policy changes, particularly with regard to foreign trade, regulation, tax and spending, can affect an economy’s growth and inflation outlook, as well as directly affect businesses and consumers.

During election years fiscal policy has traditionally been loosened and steered towards benefiting consumers as candidates for office seek support through proposals for tax cuts or spending plans. At the same time, certain sectors and industries may benefit from specific pledges.

“Historically a country’s macroeconomic backdrop has had a greater impact on the markets than election results, although the latter can mean some removal of uncertainty,” says McMillan. She says investors are more likely to see risks or opportunities in individual sectors.

For example, she says defence stocks benefit from higher military spending and healthcare may benefit from reform and investment, while infrastructure and certain commodities can benefit from a government’s pledges on transport, power or water facilities, as evidenced by recent government spending programmes tied to the green transition.

As 2024 is the largest election year in history, Darius McDermott of FundCalibre, a fund rating service, says it would be “ill advised” for investors not to have at least half an eye on the results.

“Take the US. If Donald Trump’s lead in the polls continued to widen and a victory started to look increasingly likely, you would probably see a boost to oil and gas stocks,” he says.

“He has continuously expressed his support for these traditional energy sources and we would expect this to act as a tailwind to their share prices.”

However, McDermott says Trump is also a maverick and a return to the White House could spell volatility and uncertainty.

“The former president has already said he wouldn’t reappoint Jerome Powell as chairman of the Federal Reserve [the US central bank], and the prospect of a non-independent chair can only be negative for markets, and particularly for American bonds,” he says.

As far as our election in Britain is concerned, McDermott says the policies of the two main parties have become “indistinguishably” aligned in many areas.

“This, I would argue, is a positive in the current economic environment and lowers the risk of sudden unforeseen political changes that could affect the value of your investments,” he says.

Regarding the elections in Britain and America, Chris Metcalfe of the asset manager Iboss advises investors to focus on what will move markets and avoid getting overwhelmed by “sloganeering, petty point scoring and lowest common denominator politics”.

To help understand who will be most affected by any changes to economic policy following the election of new governments, Metcalfe says Iboss spoke to a number of individual fund managers.

“In summary, for the US election, while the managers are not unanimously fans of Trump’s methods of governing, he is seen as being relatively market friendly,” he says. “However, a noteworthy announcement from Trump in recent weeks is one to keep an eye on, as he said he would sack Jerome Powell if he won, very much increasing his relevance to investors.”

Metcalfe says the feeling from the managers his company spoke to is that a second term for Joe Biden would be likely to bring more of the same policies as his first, although at some point America’s massive debts would require spending to be controlled.

Justin Onuekwusi of St James’s Place, the wealth manager, says the important thing for investors when it comes to elections is to look through the noise, have a diversified portfolio and then consider acting in response to specific risks and opportunities.

“It’s about preparing and not predicting, because predicting is really difficult to do,” he says. “Clearly the election risk is significant this year, so there will be additional volatility, but this doesn’t necessarily mean the market moves will be negative; they could be positive as well.”

McDermott adds: “History offers a compelling lesson for navigating today’s turbulent geopolitical landscape. While the 20th century witnessed world-altering events such as the world wars, the Korean War, Vietnam and Iraq, the stock market’s long-term trajectory remained positive.

“Short-term headwinds are inevitable, and I’d always encourage investors to be aware of the bigger geopolitical picture, but for those who are diversified and have a long-term horizon, there shouldn’t be cause for undue concern – history favours the patient investor.”

McMillan concludes: “History suggests most investors are likely to see little lasting impact on their portfolios. In our view it remains likely that the effects will be felt at the sector and country levels rather than on the economy or market as a whole.

“However, if issues remain uncertain as we run into an election, or indeed contested thereafter, be alert for the potential for markets to rally when uncertainty is removed.”

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