Global elections in 2024 – how will they impact economies and markets?

The year 2024 will be a historic one for democracy. By the end of the year, 40% of the world’s population, which contributes to over 50% of the global gross domestic product (GDP), will have had the option to vote to elect their preferred representatives – more than in any other year in history.

While it’s easy to get caught up in the noise, the reality is that elections seldom have significant impacts on markets. However, it is still important to assess their implications for economic and market performance.

Article at a glance

• Elections usually do not significantly impact markets in the long term but can cause short-term volatility.
• A clean win of both the presidency and the Congress for either party in the American elections will see the government’s fiscal deficit widen adding to inflationary pressures and resulting in a headwind for US sovereign bonds.
• A split presidency and Congress would lead to a political deadlock which may cause higher than normal levels of sovereign bond volatility.
• The Labour party’s victory in the UK is expected to provide policy stability and support the improving macroeconomic environment, positively impacting the market.
• In Europe, the shift away from green parties and high debt levels will curtail green transition ambitions.
• The political stalemate in France and the discredited coalition government in Germany will delay necessary structural reforms needed for return to higher growth.
• Despite an electoral setback for PM Modi, India’s growth story remains valid as the new coalition government continues its commitment to attracting foreign business and investment.

The United States

There are four possible outcomes for the US election:

1. A Republican clean sweep of both the presidency and the Congress.
2. A Democrat clean sweep of both the presidency and the Congress.
3. A divided government with Trump having to deal with a Democrat Congress.
4. A divided government with Harris having to deal with a Republican Congress.

The outcome will impact markets through four main channels over the electoral term - fiscal policy, trade policy, industrial policy, and immigration policy. In the short term, the most problematic outcome would be a contested election which would lead to significant uncertainty and volatility. Over the presidential term, here’s what each outcome could mean for the economy and markets.

Follow the link to see a full breakdown of the possible US election outcomes.

Republican sweep

A Trump presidency with a Republican Congress would lead to a widening fiscal deficit, more trade restrictions, less immigration, and less support for federal spending programs and the green transition..

The extension of corporate tax cuts introduced in the first Trump administration due to expire in 2026, and possible new tax cuts and credits for businesses and higher income individuals, would increase government income shortfall. This would be partially offset by reduced spending on social welfare programs and green transition subsidies. Other forms of industrial policy targeting the revival of American manufacturing and derisking from China are expected to continue.

The extension of corporate tax cuts introduced in the first Trump administration due to expire in 2026, and possible new tax cuts and credits for businesses and higher income individuals, would increase government income shortfall. This would be partially offset by reduced spending on social welfare programs and green transition subsidies. Other forms of industrial policy targeting the revival of American manufacturing and derisking from China are expected to continue.

Immigration would be curtailed under this scenario reflecting negatively on the labour market as much of the job growth over the past few years was driven by immigrants filling in lower skilled services jobs. Increased labour shortage problems in a sector already facing relatively high wage growth and labour scarcity would add further upward pressures on inflation.

Taken together, a Trump presidency is expected to be inflationary with an uncertain outlook on growth. The Fed would need to hold rates higher which would put upward pressures on yields across maturities. Equities would benefit slightly from tax cuts and reduced regulation which are likely to outweigh higher rates and knock on effects of trade disputes.

While a slim republican majority would temper some of the more extreme measures proposed a firmer control over Congress would allow the Trump administration to follow through on those promises. The key one for markets would be curtailing the independence of the Fed which would likely lead to an overheating inflationary economy in the short to medium run. In the long run blurring the division of powers and centralising it with the executive would lead to deterioration of American institutions which were key in its continued economic success over the last century.

Democrat sweep

Harris presidency with a Democrat Congress would largely lead to policy continuity with the outgoing Biden administration. Some of the tax cuts, primarily aimed at the middle class, would likely be extended while those targeted at corporates and higher income individuals would not. There would also be a reasonable chance of additional modest corporate tax hikes. Spending would increase on social welfare programs and industrial policy would continue to be targeted at both traditional manufacturing and green transition. The expected net effect would be a modest fiscal expansion, adding slightly to inflationary pressures.

Trade restrictions towards China are expected to continue. Unlike the tariff-based measures proposed by Trump, these are more likely to take form of non-tariff barriers, such as export restrictions. This would be complemented by the continued drive to reshore or ’friendshore’ manufacturing. Immigration policy would not change significantly under this scenario.

The market impact from increased debt issuance to support spending would put upward pressure on yields across the curve, all else equal. The impact on equities is inconclusive but tax increases would probably outweigh other benefits resulting in a slight headwind.

Split presidency and Congress

A political deadlock would result in reduced room for manoeuvre for the incoming administration regardless of the prospective combination. The assumption is that the presidential administration would run into obstructionism from Congress regardless of the policy. Debt ceiling and budgetary showdowns would be anticipated leading to elevated volatility for fixed income assets. On the other hand, curtailed spending plans would be a slight tailwind for sovereign bonds.

There are, however, two key differences between the possible outcomes. In the case of a Trump presidency coupled with a Democrat Congress, it is unlikely the corporate tax cuts would be extended as the power to do so lies with the Congress. On the other hand, a Trump administration would still be able to push through tariffs on China and other trading partners which, combined with increased taxes and reduced spending, results in the only scenario where our outlook is for the American deficit to narrow. Abstracting from political instability induced volatility, this should be a tailwind for American government bonds.

Follow the link to see a full breakdown of the possible US election outcomes.

United Kingdom

After 14 years of governance by the Conservative party, the Labour party has now secured a majority of 174 seats in the House of Commons. The political implications of this shift will continue to unfold over time, but the immediate response from the market should be relatively subdued. The primary factor influencing the sentiment towards UK assets is the already improving macroeconomic environment: growth is starting to rebound, a slow recovery is anticipated, inflation is near target, and the Bank of England is expected to start cutting interest rates before the end of the year.

The Labour party’s victory is expected to support this trend in several ways. The most significant of these is policy stability. Since the Brexit vote, business investment has been stagnant due to policy uncertainty. A strong majority should enable the Labour government to establish and fulfil expectations throughout the entire parliamentary term. The full expensing of business investment, introduced during the last Conservative government, is expected to remain in place as it has already produced positive results.

Inherited fiscal realities also mean that large scale changes to fiscal policy are not likely. Personal income taxes are not expected to change drastically, and large-scale borrowing is limited by concerns of a meltdown in the Gilts market, similar to the one triggered by the Liz Truss’ “mini-budget”. Social programs are likely to be funded by increasing taxes on carried interest, non-domiciled residents, and energy companies, which could negatively impact the sector that has a high weighting in the FTSE 100 index. Conversely, investment in green energy generation is expected to rise.

In summary, the improving domestic macroeconomic environment should bolster the FTSE 250 mid-cap companies, which are more domestically focused, compared to the internationally oriented businesses that make up the FTSE 100 index. However, to fully realise UK growth potential, the most crucial factor will be the ability to implement planning reforms to upgrade the UK’s aging infrastructure and address the housing shortage which are currently having a negative impact on disposable income, labour force growth, and productivity.

Europe and France

European elections have delivered perhaps the biggest non-change this year. The parties of the pro-European centre, which typically form a grand coalition, have mostly preserved their vote share at the European level. This has simplified the allocation of top positions: Ursula von der Leyen from the centre-right EPP will continue as the President of the Commission, Antonio Costa from the centre-left SPD will serve as Council President, and Kaja Kallas from the centrist Renew will act as High Representative for Foreign Affairs. However, far right gains, mostly at the expense of Greens and the ruling parties of France and Germany, have sent shockwaves around Europe. Most notably, a snap election by President Macron in France resulted in a hung parliament dominated by the far left and the far right.

The primary impact on the market will be a revision of investment in green transition. The shift away from green parties, coupled with high debt levels from pandemic spending and increased defence spending due to rising geopolitical tensions, suggests that Europe, while still the most committed of all major Western regions to the green transition, may need to moderate its ambitions. Secondly, the political stalemate in France and the discredited coalition government in Germany are likely to delay the structural reforms necessary for these two largest European economies to return to higher growth rates.

On a more positive note, with neither the far left nor the far right gaining enough seats for an outright majority in France, the possibility of sovereign debt market stress has greatly diminished. While the far-left led coalition proposed a program of high spending funded by taxes on the wealthy and more borrowing, disregarding the European fiscal discipline procedure, this is unlikely to pass as any path to coalition government requires tempering of those ambitions to strike a deal with President Macron’s centrist party which fared much better than expected.

Just like in the UK, the primary factor influencing the performance of European equities is the improving macroeconomic landscape. This includes accelerating growth, low inflation, and an impending cycle of interest rate cuts. Against this more positive backdrop, we recently neutralised our underweight asset allocation call for European equities.

Emerging markets

Several emerging market economies have recently held elections. In India, the BJP party, led by Prime Minister Narendra Modi, has lost its absolute majority and will now need to govern as part of a coalition. This change may lead to alterations in spending plans and policy objectives, but the overall growth narrative remains unchanged. It’s evident that the government will maintain its efforts to attract foreign business and investment, a move that has been swiftly acknowledged by the markets.

In Mexico, Claudia Sheinbaum from the ruling MORENA party won the presidential election as a candidate promising continuity. However, the financial markets were unsettled by the supermajority achieved by the ruling alliance, which permits constitutional changes. Foreign investors are concerned that these changes might undermine the rule of law and the independence of the central bank. Despite reassurances from the incoming finance minister, the markets reacted negatively, leading to a sell-off and a drop in the value of the peso.

Conclusion

In summary, while elections often bring short-term volatility, their long-term impact is more muted.

In the US, the fiscal deficit is expected to continue growing which, all else equal, is a headwind to sovereign bonds. The large majority of the incoming Labour government should provide policy stability over the next five years which should be a tailwind to UK assets. In Europe, political stalemate will delay structural reforms needed to return to higher growth. Across the developed world, green transition targets are moderated by fiscal realities and political shifts while geopolitical tensions continue to put strain on global supply chains.