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01/24
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The Year of the Election

By Andrzej Borkowski

Happy New Year, 2024 is the Year of the Dragon, but while each animal in the Chinese zodiac is supposed to exhibit unique personality traits, its effects on markets are luckily not significant (and yes there was an academic paper that crunched the numbers, link available on request!).
Therefore I have taken the opportunity to rename 2024 to the “Year of the Election”. Now I have written previously a few years ago about elections and markets, and at the time concluded that in the US at least they haven’t historically had a huge impact on market returns, but 2024 is unusual in that so many countries around the world will have (or have very recently had) important Presidential and Leadership elections AND the Economic and Political backdrop this time around is noticeable different to those that have been seen for quite some time.
This year there will be elections in every Continent. The highest profile will obviously be the United States. Here in the UK a general election needs to be held by January 2025, so it is likely we will have one within this calendar year. Across the rest of the EU 8 member states are due to have elections. In Africa important countries such as South Africa, Senegal, and Rwanda. The Indian Subcontinent will see India, Sri Lanka and Bangladesh all going to the polls. In Southeast Asia Indonesia, South Korea will all be voting, and last weekend Taiwan held their election. Rounding off the list will be Mexico and Russia.

While in a lot of the countries there are not expected to be many surprises, over the last few years there have been trends to more “populist” leaders and “populist” type policies, and so going into 2024 with inflation rates higher in many countries than they have been for some time, interest rates likewise higher in many places, not to mention more geopolitical stresses, it is worth being aware of. The Presidential election in Argentina towards the end of 2023 would be a good example to use.
Looking back at 2023, the Economic consensus was that we should have already had a recession and probably still be in one as I write, as I mentioned in my Brief “W-AI-ting for Godot”, the recession that was expected to hit many countries in 2023 didn’t materialise. And with that the validity of many traditional Economic models and indicators used by professional Economists have been questioned. In the same way that previously rate cuts had floated all boats in the market and economy, the expectation was that higher rates would have the opposite effect and at least some sinking was to be expected.

Now overall the outcome of 2023 was not a smooth journey, but a lot more businesses and households (in the US especially) had locked in various borrowings (mortgages, loans etc) at low rates and so were able to get through 2023 without being too impacted. The US typified this, where there were some sectors of the economy that experienced slowdowns, Real Estate for example, and banking, but those cracks were generally smoothed over through large amount of Government (Fiscal) spending and other loosening measures the US Treasury carried out (to help fund their spending). Fiscal spending, especially to the extent that was seen in the US in 2023, is rare, so may also explain why its impact was not fully seen in various economic models, which usually look at interest rates, inflation, and employment. In fact some commentators have said that 2022 and 2023 did in fact see a recession, but it was a “rolling one” going sector by sector and never spreading to too many places at once to cause the sort of widespread textbook recession people are used to seeing.
So during 2023, while the US Central Bank was trying to keep things “tight” Financially to slow their economy through higher interest rates, the US Government had other ideas. In terms of Financial Markets, 2023 saw most of the stock market returns come from just a handful of the very largest Technology companies, rather than being spread out more evenly over multiple countries and sectors.
So now looking out towards 2024, as mentioned at the beginning of this Brief, politics and Geo-politics will feature heavily, but so will Government spending and Government debt. And while it appears that inflation and with it also interest rates have peaked in most Developed Economies, the question is now when will Central Banks start to cut interest rates and by how much, especially with things like unemployment remaining low? This is particularly important in election year in the US for example, where neither political party will want to cut government spending, but likewise if this causes inflation to start to bubble back up, that is not a good starting point to try and win an election from. The consensus view by market commentators for 2024 is for multiple interest rate cuts and a “soft landing” ie a mild economic slowdown.

From an investing point of view, politics, and geo-politics aside, falling, or stable interest rates, and likewise falling or at least stable inflation is typically positive for Financial Assets such as Equities. Continued Government spending especially in areas like Infrastructure, that can find its way into the broader economy should also be helpful to Equity markets. The UK market likewise may also get its time to shine relative to the US this year. Likewise there is an expectation for new innovations in healthcare to also start to become more prominent as we go through this year.

So as a summary of what 2024 may bring:
• Stable and declining inflation and with it expected interest rate cuts should be typically positive for Growth Assets. Provided of course that any continued decline in inflation is not a result of a broader economic slowdown.
• Democracy and Debt – There is a lot more going on this year in terms of politics, Government debt and Geopolitics compared to the last few years.

How we are positioning portfolios for this:
• We’ve positioned our client portfolios to reflect a lot of these ideas and themes. This means overall taking a more cautious approach and looking to balance risk and return as efficiently as possible.
• Within Equities, overall we’re tilted towards undervalued or “value” parts of the market, energy would be an example here, as well as towards profitable “quality” companies’ things like healthcare and likewise tilted away from some of the more expensive technology Mega-caps.
• Within the defensive side of portfolios we still prefer higher quality bonds especially those with shorter maturities, as well as gold to provide a monetary inflation hedge.
• Other diversifying assets also feature, again to try and balance risk and return.

 

Andrzej

 

Risk Warning: Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Important Information: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future performance.

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