2024 is being billed as the biggest election year in history, with dozens of countries representing around 4 billion people expected to hold general or presidential elections. The unpredictability of election outcomes in some of the world’s most populous and economically significant nations has introduced major concerns to investors which are likely to escalate throughout the year.
2024 kicks off with general elections in Bangladesh and presidential elections in Taiwan later in January, and concludes with presidential elections in Ghana in December. In between, countries like India, Indonesia, Mexico, Pakistan, Russia and the UK will also hold elections. The headline event though is the US presidential election, which is expected to be a Biden-Trump rematch, Trump’s legal troubles notwithstanding.
Macroeconomics are likely to trump the elections themselves
Whatever the outcomes of the US election, the results are expected to reverberate across the world. Some commentators see Trump returning to the White House, or the election of another Republican populist, as the biggest risk that the world faces this year. One of the most immediate dangers is that such a presidency could usher in an era of isolationism and America-first protectionism.
This would reverse many of the gains economies have harvested from years of globalisation, in turn resulting in dampened growth throughout the world. Furthermore, if a Trump administration decides to end support for Ukraine in its war against Russia, that could undermine global security and embolden Russia and other rogue states to become even more aggressive in pursuing their self-interests.
A Biden win, meanwhile, would more likely ensure that today’s status quo continues. With so much at stake, we can expect a bumpy ride as the primary battles get underway and the election draws nearer. But history shows that the presidential elections tend to be less consequential for the US markets than macroeconomic trends and that markets tend to rally in the year after an election.
Consider the previous election in 2020, when the economic impact of the Covid-19 pandemic and the Fed’s response influenced markets more than the competing ideologies of Donald Trump and Joe Biden, or even the insurrection on 6 January 2021. In 2008, when Democrat Barack Obama ran against Republican John McCain, markets were driven entirely by the fallout from the Global Financial Crisis.
So while Biden or Trump (or another Republican candidate) may suggest and implement policies that impact individual stocks or specific sectors, medium-term performance will be largely determined by macroeconomic factors. This year, it’s all about whether the Fed guides the economy towards a soft landing and whether there will be growth in corporate earnings. A recent research note by Goldman Sachs anticipates that S&P 500 companies’ earnings could rise 5% or more in 2024, this being above the median forecasts of strategists tracked by Bloomberg.
Europe’s election spotlight
This year is also an important election year in Europe. The UK, Europe’s second largest economy after Germany, is expected to hold a general election this year. Polling suggests that the Labour Party will sweep into power with a comfortable majority under the centrist leadership of Keir Starmer. But his party may face a significant challenge reigniting growth and repairing the country’s neglected public services.
The European Union, meanwhile, holds elections for the European Parliament, while member states such as Belgium, Croatia, Finland and Lithuania are also voting in general or presidential elections. The outcomes of these polls could have a significant impact on the bloc’s future cohesion and direction amid concerns about a swing towards right wing populism across Europe.
Policy impacts in emerging markets versus developed markets
When it comes to emerging market countries, differences in policy and fiscal outlooks between different leaders and parties tend to have a larger impact on markets than in developed countries. Reuters divides the 2024 elections in emerging markets into three categories: Those where the outcome is a foregone conclusion, such as Russia or Venezuela; those where the outcome is predictable but not 100% certain such as India, Mexico or Indonesia; and those where there is genuine uncertainty, like South Africa.
In many of these countries, the incumbents are loosening the purse strings and reverting to populist rhetoric to retain power. A lack of fiscal discipline on the part of an emerging market tends to unnerve investors, with an outsized impact on currencies and borrowing costs. Conversely, signs of market friendly reforms tend to help boost equities and currencies.
Even so, emerging market performance tends to be heavily affected by sentiment in the rest of the world. Barring unique factors such as sanctions against Russia or an escalated regional conflict in the Middle East, most emerging markets will get a boost if the soft landing in the US comes into view and investor appetite for risk increases. Again, global macroeconomics matter, including for South Africa.
An accelerated shift to socialism in South Africa
In South Africa, the ANC has embraced a range of populist laws and policies to shore up its popularity ahead of the election and advance its National Democratic Revolution (NDR) objectives. These include the Employment Equity Amendment Act, the National Health Insurance (NHI) Bill, and the two-pot retirement reform system.
All of these policies point towards leaders with a history of incoherent strategy, unsuccessful turnarounds and unsound governance as they continue to move the country towards centrally controlled economic planning. But with government services such as ports, rail, power and water supply collapsing and a moribund economy, these measures might not be enough to retain power.
As urban South Africa turns away from the ANC, the party faces the prospect of losing its outright majority. The prospect of the ANC needing to partner with the Economic Freedom Fighters (EFF) or another radical party poses a major risk to the rand and the JSE. Meanwhile, a strong showing by centrist parties might not necessarily translate to a tailwind for the markets in the short-term. All of this leads us to expect a volatile few months as electoral campaigning heats up.
Navigating market noise and focusing on long-term growth
Democracy is noisy and unpredictable. As the unanticipated election results in Argentina, the Netherlands and Poland in 2023 or the Brexit vote and the election of Trump in 2016 illustrate, upsets are always possible. As such, investors should not allow themselves to be distracted by the short-term clamour of democratic machinery in motion.
Dynasty does not try to predict or bet on election results, although electioneering and results may heighten performance volatility along the way. Instead, our view is that outside of geopolitical risks such as a widening of the conflict in the Middle East, market direction is likely to be driven by the extent to which interest rates are cut relative to consensus forecasts, and the extent to which corporate earnings exceed or underperform projections. We believe that our clients’ portfolios are appropriately positioned in line with this approach.
