Without a doubt, 2024 is a big year for elections. In the next 12 months, over 64 countries plus the EU, are heading to the polls. Some will surely close in surprise results.
The prospect of any election in any country brings with it an inherent unpredictability, particularly if new parties come into power. Any changes in political leadership increase the chance of new policies or regimes, raising concerns among investors about what it may mean for their portfolios.
At the moment, specifically, the polarising nature of so many upcoming elections is an obvious cause for worry. Most notably, with Trump poised to run against Biden in the US election, there is potential for wide-reaching implications on both a national and international stage.
For instance, should Trump win – a man not known for his delicate diplomacy – already heightened geopolitical tensions could escalate further. According to his recent comments, he would want to tax all Chinese goods entering America at 60%, which would likely result in more withdrawals of foreign capital from the country. Domestically, Trump has claimed he would want to replace Jerome Powell as Chairman of The Federal Reserve, which could act as a destabilising factor closer to the election, especially for bond markets.
More generally, governments have the capacity to shape policies that can materially alter business decisions, impacting how corporations and organisations function. The allocation of public funds by political parties is another element capable of shaping the economic backdrop. Election outcomes could, then, affect companies – positively and negatively.
Investors may, therefore, try to anticipate election results, to get ahead of the curve. But is that the best approach?
Looking at the long term
Accurately predicting election outcomes is extremely complex, if not impossible to achieve consistently. Instead, while politics should be considered throughout investment decisions, they should by no means be the sole focus for investors. Politicians may talk a great deal about what they say they will do, but in reality, very few changes are ever made. In the US, only approximately 50% of all legislation promised to the electorate is actually passed.
Moreover, staying with the US as an example, history has shown that there is no consistent pattern between the party in power and growth in Gross Domestic Product or returns on the US stock market. Economic factors tend to be bigger drivers of returns. For instance, looking back at the year 2000, another election year, returns were driven by the tech bubble. Or, in 2008, the driving factor was the global financial crisis, while 2020 was dominated by COVID – not who won the Presidential election.
With elections being incredibly difficult to predict, positioning portfolios on assumed election outcomes is a risky strategy. Even in the UK, where the next General Election will be between centrist political parties, making investment decisions, based on Labour looking like the likely winner, remains precarious. Zoning in on what is happening in the economy is a better approach – especially when used in tandem with a long-term view.
At Square Mile, we use a long investment outlook for precisely this reason. Looking at the long-term allows us to position our portfolios so that they are capable of performing in any economic condition – irrespective of a government’s leaning or the leadership style of a President or Prime Minister.
Additionally, our approach employs a nimble strategy where we can make tactical tilts to our strategic asset allocation. We can then be reactive to election results when they happen, if needed. Waiting for results means we can make decisions based on specific policy impacts without speculating on winners. With a philosophy focused on diversification, we are never overexposed to just one region or sector. Should an election outcome cause upset in a country, our overall performance therefore won’t be adversely affected. We also advocate investing in quality. With the prospect of political uncertainty and instability, investing in quality is key as high-quality companies are the ones which can tolerate trickier economic climates.
When taken as a whole, our investment philosophy is one that is designed to weather the instability an election can bring. Or, in 2024’s case, 64 elections.
*Investments carry risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
