Changes of government can affect investment strategy

Changes of government can influence markets. Sending opposition leaders to prison is now a regular part of the battle.

| 7 min read

As investment managers and strategists, we need to have a view of how governments will develop and what changes new governments might make to economic and financial policy. We have a view of a world split between the advanced democracies led by the US and the authoritarian states led by China. They compete over trade and influence in a way which creates trade frictions, political tensions and a retreat from globalisation. Many emerging market countries look on and seek support from both blocs.

The dreadful death of Alexei Navalny, the leading opposition figure in Russia, in a state prison is shocking but not surprising. We expect the authoritarian bloc to have a hostile approach to political opposition and to use and abuse the power of the state against challengers. It is not a good career move in Russia, China, Iran or North Korea to be critical of the government. The authoritarian states arrest and imprison opponents for their political views. Political opponents may also meet early deaths or experience poisoning or torture.

In the democracies that are still rightly appalled by torture and deaths in custody in some authoritarian states, there is increasing resort to the power of the state to make opposition more difficult or impossible. This is a complication in judging how governments might change, as it is not just about judging the public mood but also forecasting how the state prosecutors and courts will behave.

Lawfare and the US election

In the US, we see a Republican challenger to the Democrat President facing 91 different charges. Some are serious criminal offences, where being found guilty would send Donald Trump to prison. Some are challenges to his businesses and wealth, where Democrats would like to tax and fine him to the point where he ran out of money, making it difficult to pursue the campaign.

Mr Trump dismisses all these actions as abuses of state power whilst Democrats are sure there are good grounds to prosecute and think he is unfit to run for office. Now, New York state has found against some of his business practices and banned him from running a business there, some Republicans are planning retaliation, threatening to stop running trucks into New York to make deliveries. Large fines and preventing Mr Trump from running a business will have a substantial impact on his income and wealth and could limit his ability to campaign for President.

Impeaching a President for “high crimes and misdemeanours” has become commonplace by both sides. Democrats got Richard Nixon to resign as he faced impeachment. The Republicans saw Bill Clinton win a Senate vote against their attempt to impeach him. President Trump won Senate votes against two Democrat attempts to impeach him, and Joe Biden awaits developments on a Republican wish to impeach him. Successful impeachment would remove an elected President without voters expressing a view through the ballot box.

Trying to stop popular movements and parties by legal means is fraught with the danger that it can lead to greater popularity.

In the European Union (EU) resort to the law is a popular approach by governing parties facing so-called populist surges in the polls. Marine Le Pen’s party is leading the French polls for the European elections. She is facing criminal charges over use of EU funds for or by her office. In Germany, the AFD is polling well. In Saxony and two other Eastern states where they are particularly strong the authorities have said they could be a threat to democracy and have put them under surveillance.

In Poland, where the Justice and Law party has recently lost its parliamentary majority, two former Law and Justice Ministers have been arrested and put in prison for actions they took in 2007. The Polish president is attempting to pardon them again to release them from prison against the wishes of Prime Minister Donald Tusk. In Spain, the Catalan national party leaders were prosecuted and imprisoned for holding an unauthorised referendum on independence. They were subsequently let out and their party is now needed to prop up the governing coalition.

In Greece, Golden Dawn and its successor party Hellenes has been banned for extreme nationalist views. In Hungary, the EU is challenging the ruling party Fidesz’s new sovereignty law, claiming it impedes a free press and criticism of the government. In the run up to the European elections the strength of polling for EU sceptic or populist parties may lead to further legal actions against these groups in various countries.

Democracies send leaders to prison

In Brazil, President Lula da Silva spent time in prison for alleged bribery and corruption when in office involving the nationalized oil company. Following his release, he won the presidency back. Now he and the state are pursuing former president Jair Bolsonaro, claiming he committed offences against democracy and the state by not accepting the early verdict of the election. He has been banned from running again before 2030.

In Pakistan, the leader of the main Opposition party is in prison. His party was banned from running candidates and from using its name and logo in the recent election. Despite this, independent candidates who probably remain supporters of Imran Khan's party won more seats than the governing party. There are big rows about the conduct of the election and the refusal to allow the strongest opposition party to run. In Thailand, the former Prime Minister who was exiled and then imprisoned has now been let out. He is thought to be too old and ill to resume his political career.

Trying to stop popular movements and parties by legal means is fraught with the danger that it can lead to greater popularity by the party or candidate under siege. They can become martyrs and rally the public against the government waging lawfare against them. All democracies must be able to distinguish between the rare cases where a president or prime minister has committed serious crimes such as theft or fraud in public office that should be punished, and cases where the opposition party when it wins and wants to take revenge on the former government and cripple the opposition’s chances of winning power back.

Democracies also must make difficult judgements over preserving the right to free speech whilst not allowing its abuse with hate speech. Judging which is the case itself can become a very partisan matter.

Democracy suffers when the two parties cannot agree on the rules and results of an election and cannot agree on whether a senior politician is a criminal or an annoying rival. Lawfare will play an important part in both the US presidential election and in the European elections this summer. It is likely in many cases the legal charges reinforce the views of both sides rather than help create a common view of what is reasonable conduct and what is unacceptable.

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.

Changes of government can affect investment strategy

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