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Oppositions sometimes move markets

Normally investors concentrate on studying central banks and governments that can make a difference to economies and companies. But, sometimes, opposition parties matter too.

Charles Stanley

in Features


The policies of the big three – the USA, China and the European Union are particularly important as they help shape the world economy’s path and have considerable influence over company performance.

Markets can usually ignore oppositions. The exception is in the run up to an election in an influential country where there is a significant possibility of a change of government, when markets do look at the opposition programme and consider what impact it would have on bonds and shares.

It was necessary to read Joe Biden’s plans carefully prior to the last US presidential election because it was both likely he would win and inevitable there would be big changes of policy if he did. The first election of Narendra Modi in India and Shinzo Abe in Japan were also significant events heralding important changes of policy for those countries.

There are also times when, in practice, oppositions have an impact on investor views and equity valuations without gaining the same recognition of how and why. Today, it is widely accepted by the media that Brazil is suffering very badly from the pandemic and has a government that has failed to take the right actions to control and treat it.

Lula rising

Brazil’s equity market has been underperforming the US and World indices since early January, falling against the trend. The media regularly gives us the rising numbers of deaths for what is a highly-populated country – pointing out that the death rates per million are still higher in the US and several European countries.

This is a success for Lula da Silva, the former president who has recently seen his political rights restored. He is now busy persuading the world to his view of the incompetence of the Brazilian government. He has now edged ahead in the polls for the October 2022 Presidential election. Should he win, there would be a fundamental change in policy in Brazil.

Germany is also struggling with the pandemic after relative success last year. This stems from splits within the ruling CDU party, with Angela Merkel providing her own opposition to German regional governments for not shutting down enough - and allowing her successor as CDU leader Armin Laschet to take the blame for recent political reversals. German figures for cases and deaths are still relatively low by European standards. So far, this has not stopped the Dax index making progress on hopes of a decent industrial recovery.

The long run up to a very uncertain German election in the autumn needs to be considered. The polls show less support for Merkel's CDU party and a surge in Green party voting intentions. There is talk of a possible Green/SPD/smaller party coalition excluding the CDU and CSU, which would represent some change of approach.

Democracies rely on good and strong oppositions to keep governments honest and to provide a real choice at elections. It means taxpayers pay the salaries of a substantial number of people to spend their days identifying serious problems the government has not tackled well, or revealing errors, omissions and corruptions in the way government responds. Investors need to keep an eye on what active oppositions are saying in case they start to make the weather on a major issue or pick up an early and significant change of mood.

Discount the undemocratic

Single-party and autocratic states take the opposite view to the democracies. They spend a lot of time and money repressing critics and criticisms. They insist on everyone in the media following the official view.

Markets understand they are being fed what is convenient or what the government would like to be true. As a result, some people in the markets specialise in trying to present an alternative to the government line where it is obviously too rosy or simply wrong. It also tends to mean a discount is applied to the assets of such a country.

The rise of the environmental, social and governance (ESG) movement is likely to reinforce this autocratic discount, as investors will become more concerned about violations of human rights in the countries concerned and what it means for corporate governance.

The increasingly hostile US approach to human rights abusers in the international community will have an impact on various ESG investors. We are moving into a world of more widespread bans and strong influences against bad conduct. Institutional investors will need to keep alert to the ESG debates about what is acceptable.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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