Markets seem far too relaxed about world elections; we suspect from ignorance. Logically if you move from certainty to uncertainty (with a range of possible outcomes) you should adjust your level of risk. India has already shown some of the volatility of the ‘wait and see’ approach.
Too hot?
So, we start there, where prior confidence in an enhanced majority for Modi, was well wide of the mark, he ended down 63 seats at 240; a majority is 272. Some of that chaos is the electoral system, and some of it the ban on opinion polls – although some accurate information inevitably crept out, despite restrictions, but international investors did not pay much attention to it.
So, when the exit polls announced all was well, the market rose, only to reverse hard when the real result emerged within a few hours. Although then buyers came back in, and we ended up flat.
From this website – date published : 8th June 2024.
On a call with local managers, (and the options for investment in India are wider than you might assume) clearly something had changed, one was almost pleading with the international audience not to take money out. Very little spooks other fund managers quite like being repeatedly asked to not redeem.
The Congress Party has almost doubled its seats, from 47 to 99, a strong result. The other beneficiary was the Samajwadi party, nominally socialist, with a strong presence in Uttar Pradesh, a vast Northern state. They went from 5 to 37 seats and are very much in Modi’s BJP territory.
India has always had strong states, with the more populous ones often having a local ruling party, which has been around for ages. So, this is a reversion to the long term normal.
In house collage of a state by state analysis of Indian share ownership percentages
But that is what scares investors; coalitions nearly always break down. There was also damage to the Index from the Adani group of interlocking holdings (long hounded by Congress for alleged corruption).
A weaker Modi
That allied with the long-standing fears about political corruption, uncertainty of policy and no national enforcement, is an unwelcome reminder that Modi is now in his last term. Hopes that stability will follow him, rather than a swing back to the broken past, always felt optimistic.
The commonly voiced issue is that a weaker Modi will have less ability to drive structural reforms and will find it harder to resist welfare payments, and labour demands. Historically, some of these payments and concessions reach the poor, either in higher consumption or better services, but a great part gets stuck with middlemen. That should be less of a problem now, as a result of reforms already implemented, putting in a national bio identity scheme and almost universal individual banking services.
We will see.
While generally expecting strong growth to persist, we are now more cautious about signs of the lost consensus, into the medium term.
The UK – far too chilled
Which brings us to the farce that is a UK General Election, where such discourse as there is has been about whether families are or are not facing a £2,000 tax hike (or roughly 20% more for those on average earnings). Not knowing where they live, or how they spend their money, or indeed how they will adjust to high taxes, you can never tell these things with much accuracy.
This comes with minute (and futile) attempts to list every one of the myriad ways that the assumed tax hike won’t happen and extracting a “pledge” from all parties not to raise them. As if all Chancellors do not have multiple ways to raise revenue, carte blanche to create new charges, and a great ability to lie or concoct exceptional circumstances to hit us. Sunak of all people should know that.
Yet most voters are thinking, is that all? Is it enough? We know that existing service demands are not being met and that no party seeks to resist the endless demand for expanded services.
I doubt if growth will save us either: we are close to the point where those that can take investment elsewhere, have left, and no sane investor would now invest, without substantial state subsidy. So, we are simply building up to an inevitable budget crisis in the medium term.
There are a few who hope that change will be its own reward, maybe, but we can’t really tell much until after the first Budget, (Labour have pledged to revert to just one a year), and a couple of Parliamentary sessions.
Just waiting and hoping is illogical. Markets do just that, though.
Frozen in the US
Which brings us finally to the USA, the Presidential election feels (to me) fairly easy to call, but how the US Congress and Senate go, does not; the resulting power (or otherwise) of the President is less easy to predict. It may be that we get a split between parties again, which markets like, and it feels unlikely (but possible) that we end up with constitutional change, which markets certainly won’t like.
The current Federal Reserve Chairman will be in office for all of 2025, but almost certainly not beyond that, and who replaces him, will figure high on the consequential concerns, as unlike other Central Bankers, he sets the global tone. Powell is not popular with either of the spendthrift presidential candidates seeking office. Nor will he be trying to get reappointed. He has been an odd and erratic champion for the dollar and sound money, but he has been that.
I am not sure other elections are so consequential, the European Parliament has hopefully done its worst already, while investors in both Mexico and South Africa are starting from a low base of limited ambition.
So, to us, the question is how long to follow benign short-term themes, while such dramatic shifts may be hitting us within six months.
Inactivity from ignorance remains attractive, but is it wise? At some point in the interim, markets will probably decide not.