In case you had not noticed, there are a lot of elections this year — by some estimates, half the world’s population will be able to cast a vote.
“Are you better off today than you were four years ago?” was the critical question Ronald Reagan asked beleaguered President Jimmy Carter on his way to winning the US presidency for the Republicans in 1980.
Undoubtedly, the state of the economy can have a big influence on who is elected. But what about the other way? Do changes in government make much difference to stock markets or sectors?
Intuitively, you might think stock markets prefer rightwing governments, but history does not bear this out. In the UK, the first Blair Labour government in 1997 came to power amid a huge bull run in equity markets. It is not obvious that his policies had anything to do with the internet boom behind it.
Similarly, the past nine years of solo Conservative government have seen few gains. The FTSE 100 index is up less than 8 per cent in that time. To be fair, UK growth stocks have performed well, such as data and analytics group Relx — up nearly 140 per cent. Large growth companies are more often affected by global economic conditions than by local politics.
What has weighed down the FTSE 100 are the banks, oil and mining stocks, which have struggled. Stocks like these — in regulated or cyclical sectors — tend to be more vulnerable to political influence. And, given how many of them there are in the UK index, it is worth looking closely at what a Labour victory might mean. Let’s start with the cost of debt.
The Liz Truss debacle aside, the general assumption is that Labour governments struggle more to contain spending — so international investors might demand higher yields on UK gilts. As UK inflation rates remain jumpy, yields on gilts are also jumpy — as can be seen by the yield on the 10-year gilt rising from 3.4 per cent to about 4 per cent so far this year. This fragile background would be unhelpful for an incoming Labour administration, especially if it makes too many spending pledges.
Rising gilt yields have actually created investment opportunities, in my opinion, bringing UK property shares down to attractive valuations. I hold Land Securities, Great Portland and Shaftesbury (all of which have performed poorly and depend on London thriving — and it seems to be). These conditions also tend to leave mortgage rates higher, which is unhelpful for the consumer, the banks and the building sector.
Some people argue that banks like higher rates — they can make more on the difference between what they charge lenders and what they pay depositors. I see little evidence of that — rates are much higher than they were three years ago, while UK bank shares are lower. Banks like thriving economies.
As for the housebuilders, both parties promise to reform the planning system and build more affordable houses. They have been promising this for decades. Please do not be gullible enough to invest on a politician’s election promises.
Politicians across Europe have been reviewing net zero commitments. A recent FT report cited a European Commission document that estimated the EU must spend €1.4tn a year to reach “economy-wide carbon neutrality” by 2050. Note that “carbon neutral” is a looser target than net zero, allowing for more offsetting and vague boundaries. As this comes to a bill of €4,000 a year each for the EU’s 350mn taxpayers, I suspect it will fail to win popular support, despite most voters seeing climate change as a major issue.
The infrastructure requirements of net zero worry investors for several reasons, not least that costs tend to overrun and too much of the technology is still early-stage and not proven at scale.
Investors are understandably nervous about energy stocks — when governments intervene in sectors, the return to shareholders often falls. If a Labour government used taxpayers’ money to subsidise extra renewables alongside private capital, it could be politically awkward if that private capital showed high returns.
This may help explain the dreadful returns from European renewable energy stocks: Ørsted shares down 38 per cent over the past year; Vestas down 10 per cent; the UK’s SSE down 10 per cent. The reluctance of politicians to reward private capital for doing public work, such as investing for a cleaner climate, seems a European hang-up — but not a US one.
Many have invested in stocks and funds in the energy transition hoping for good investment returns while also helping the planet. Unfortunately, it has proved a cautionary tale, underlining how applying one’s own political hopes and dreams to the stock market can result in disappointment. Which brings us on to the US election this November.
Assuming it is Donald Trump vs Joe Biden, a Biden victory would doubtless be seen as “more of the same” and therefore supportive of health insurers such as Humana — which administers a large amount of Obamacare — and renewable power companies such as First Solar. Both have been poor performers recently, perhaps reflecting Biden’s deteriorating election prospects.
That said, in the US the returns to private sector capital in the electricity sector tend to be protected from political pressure — states typically offer contracts that lay down a return on capital employed, and these contracts are not affected by changes in Washington.
A second Trump presidency is likely to be seen as positive for US equities, not least as his last presidency saw a strong equity market, partly due to tax cuts. For the Magnificent Six (let’s face it, Tesla has crashed out), it seems unlikely that any major Department of Justice investigation into digital monopolies will happen under the Republicans. Lina Khan, Federal Trade Commissioner under Biden, threatened much but changed little.
However, with Trump nothing is certain. He has grievances to settle with social media platforms that have banned him and given his opponents airtime. Also, it should be remembered that the Sherman Act, still currently the base of US competition law, was introduced by a Republican — Theodore Roosevelt. All the same, it is hard to see many Republican principles in common between Roosevelt and Trump.
A Republican administration tends to want the Fed to cut interest rates, tends to be soft on prescription drug pricing and tends to cut taxes, encouraging the middle class to spend. The unpredictable nature of a Trump White House, however, might make bond investors cautious, leading to persistent inflation and interest rates slow to fall.
Lastly, Trump and his Republicans seem likely to raise defence spending and press others to follow. So the winners of any of the elections will face serious spending challenges — balancing between rising healthcare costs, greater defence spending and funding the energy transition.
As Paul Johnson at the Institute for Financial Studies has pointed out, UK defence spending in the 1950s was over 20 per cent of GDP and health spending around 8 per cent. These ratios have now reversed. There is therefore no longer any “peace dividend” to use to fund healthcare. This means the winners of this year’s UK elections are likely to face tough choices that will be difficult to obfuscate. Do they want to spend on health? Or climate change? Or defence? Voters are unlikely to believe any who claim they can pursue more than one of these.
Oddly, a Trump victory, from that point of view, might well be bullish for European defence stocks. Funny old world.
It is worth being aware of areas vulnerable to political influence, but the atmosphere during elections can be febrile. With each party continuously attacking the competence of the other and your own political preferences at play as well, it can make you fearful. Don’t let it distract you from investing in your chosen stocks. Finally, remember that most companies just get on with it — whoever is in charge.
Simon Edelsten is a former fund manager
