Posts tagged ‘politics’
Political risk is a familiar concept to investors in certain contexts. Unrest in the Middle East which has an impact on oil, arbitrary rule in Latin America, and more recently excitement in Europe and strife in Ukraine are well-worn talking points which have had material impact on price behaviour from time to time.
Less familiar, though now certainly being talked about more and more, is the political risk associated with the forthcoming general election in the UK. The association of election results with movements in the London stock market seemed to have gone out with flared trousers and the FT 30. But this week, high-profile business leaders have added public weight to the private concerns of an increasing number of market participants that a Labour, or Labour-led government under Prime Minister Miliband would see a return to the kind of soak-the-rich, wage-and-price control maladies which made Britain the sick man of Europe forty long years ago.
We can return to those fears shortly.
Another reason for concern in the minds of some is the level of uncertainty associated with May’s result. The standard methodology for forecasting election outcomes is the “uniform swing projection”, under which the change in vote share since the last election as indicated by opinion polls is applied to each individual constituency. At present, this would give a hung parliament with Labour short of an outright majority by one seat.
As anyone who follows the news will be aware, however, uniform swing projection is shaping up to be a particularly poor guide to the new parliamentary makeup due to hit us in 2015. Taking the most obvious example, the national vote share of the SNP is minimal at around 5%, but within Scotland – which will return 59 out of 650 MPs – they are about bang on the 45% they polled in the secession referendum. With the unionist vote split three ways and more this puts them in their strongest ever position and they are expected to take most of Scotland’s seats. On the other hand, while the strength shown by UKIP over the last couple of years has received a lot of coverage, they do not possess the regional strength necessary to translate a national share of 15% into seats won under first past the post beyond a handful.
Betting markets are a great place to look for how this might translate into outcomes. At the time of writing, Paddy Power odds for Conservative and Labour seats put both parties on about 280, well short of the 326 required for even the most slender and unsustainable of majorities. Money is on the SNP to hold the next largest number of seats, though at only 40 this would still leave them short of being able to form the very weakest of two-party coalitions. Next come the rather emaciated Liberal Democrats at 26 (down from 57 won in 2010), with the other parties all in single figures. Try to translate this into outcomes for government of the country and markets are all over the place: shortest odds are for a Labour minority administration or a continued Con-Lib coalition, though even those manage only 4/1. There are then ten less likely scenarios before one gets to the “Grand Coalition” outcome – a Tory / Labour love-in – offered at a princely 50/1.
The current market, then, is for chaos, and if history is any guide this will mean bickering stagnation for a few months and a fresh election thereafter. Now stagnation is the opposite of uncertainty. The postponement of real change to the country, therefore, would deliver no fundamental grounds for a shift in financial markets relative to where they are today.
Back to the “nightmare scenario” of a Labour victory, in whatever sense. They recently committed by way of a Commons vote to keeping deficit reduction plans in place, simultaneously stating that this was absolutely in line with their own budgetary goals, while distancing themselves from specific Tory policies. The Conservatives, meanwhile, claimed that although Labour had walked through the lobbies promising to reduce the deficit on exactly the same trajectory as themselves, they couldn’t be trusted; and even if they could, would fail to deliver through politically-driven changes to basic concepts of arithmetic which were understandably difficult to clarify.
In other words, on the key issue of the sovereign balance sheet, both parties are in lock step: we would take exactly the same course, but the other guys would do it with a sillier walk. This is the edifying situation in which the mother of modern democracy now finds itself.
Let’s look at some of Labour’s “frightening” policies. They have made noises to the surviving disciples of the late Eric Hobsbawm about re-nationalising things but EU competition law extends to so many areas of the economy nowadays – including the railways – that it is not clear how this might be constitutional and such efforts would certainly meet with legal challenge as a result. 50% top tax is no innovation, and the Tories’ own home purchase duty changes from their most recent budget are in absolute philosophical step with Mr Miliband’s “mansion tax” in this area, and over time would have a similar effect on those perennially plunderable plutocrats at the top of the mythical money tree.
There is much more that could be said along these lines, but to refocus attention to market behaviour let us end with two observations.
Firstly, some of the mouthier rich always protest publicly at the prospect of Labour administrations. Lord Lloyd Webber, for example, famously suggested in 1992 that he would emigrate should Labour win the election of that year. Perhaps it was because of his contribution to the ensuing Conservative victory that he thankfully chose, in the aftermath of the 1997 Labour landslide, not to do so. (In the instance of this year’s contest, one of the higher-profile mouthpieces has taken the sensible precaution of neither being born nor dwelling here to begin with.) In any event such protestations bear even less relation to the economic outcome for the country than they do to election results.
Secondly, there really was the prospect of serious political change in the United Kingdom recently when the referendum on Scottish secession threatened to reduce it to the more traditional “Union of Crowns”. There was even one especially interesting weekend over which the SNP looked to be winning.
It looks certain that May of this year will bring forth a black swan to exercise temporary notional control over the government of Britain. As readers will know, it is otiose to try to plan for black swan events. It is equally otiose to expect a stagnant quagmire to yield volcanic change, or for parties wedded to near-identical policy platforms on key matters to make too much of a difference to (say) the earnings of Vodafone, the path of the RPI index or the yield on the ten-year gilt.
This year’s general election will be exciting for those whose emotional perspectives allow for that reaction. But anybody who thinks it will be anywhere near as exciting, or dangerous, for financial markets should consider calming down.
While we haven’t seen anything like the Arab Spring this year, it has not exactly been politically quiet. The recent general election in Italy, for instance, got a lot of international attention, and the new parliament has opened amid wrangling and apparent deadlock. But the market reaction so far has been very muted.
When Greece held inconclusive elections last May, European stock markets continued a decline powered by renewed concerns over the eurozone crisis, with the FTSE 100 and the Stoxx 50 both ending the month about 5% lower. Since the Italian elections this year, however, both indices are up. The Milan bourse itself is flat. Ten year government bond rates in Italy have risen by all of 14bp, and the spread to Germany remains tighter on the year to date. (Last May the increase in the 10-year yield was 50bp.)
After all, electoral chaos in southern Europe is nothing new. Since the end of the military junta in Greece in 1974 there have been twelve prime ministers (not counting two caretaker-leaders), and fifteen elections during the course of which the vote counting system was changed four times. The story in Portugal is almost identical: thirteen elections and prime ministers since the establishment of constitutional government in 1976. Italy has held eleven general elections since 1974, only one more than the UK – but it has had more than double the number of prime ministers over the same period (seventeen versus seven), a reflection of the volatility of its fragmented coalition politics.
This is not to disparage the significance of politics in these countries. Much of the interest in events in Italy centres on the popularity of the anti-establishment Five Star Movement, which won over 25% of the vote on the concise though administratively opaque campaign motto, “F- Off”. It remains to be seen how exactly the message will be interpreted by the political class. And of course the situation could have been worse. Unlike the Greeks, the Italians gave their gaggle of far right parties less than 1% of the vote, and the communist alliance did little better. (Neither won any seats.)
In Portugal, the politics leading to the 2011 election were pivotal in the country’s request for a bailout – something which it might otherwise have chosen to avoid. Likewise, the defeat of Spain’s Jose Zapatero later that year presaged austerity measures and budgetary embarrassment for his successor reminiscent of the “I’m afraid there is no money” line which confronted the UK’s incoming coalition in 2010.
If the focus on European politics continues to diminish, then, it will be further evidence that the world is returning to normal. Changes in government and electoral emergencies in countries like Italy will once again be taken in people’s stride. After all, just look how little excitement there is over the latest EU summit going on in Brussels today – there is coverage, but it hasn’t made a single British front page. Similarly, it would have been easy to miss Ireland’s successful return to the bond market this week with €5bn of 10-year paper carrying a coupon of 3.9%.
The sovereign debt problems faced by countries in the eurozone and elsewhere are far from solved. But in terms of investor confidence and world sentiment, we should remember the old adage: no news is good news.
This coming Sunday sees a presidential election in France and parliamentary elections in Greece. In the case of France it looks probable that we are to lose one half of the “Merkozy” double act that has presided over the eurozone crisis so far. When it comes to Greece the only certainty is that caretaker prime minister Lucas Papademos will no longer be in charge. Would a left wing President of France mean the abandonment of fiscal consolidation? And could popular discontent in Greece bring about demands for a renegotiation of the country’s bailout agreement, with all the chaos that could entail?
The risk from France would seem to be the lesser of the two. M Hollande, the socialist frontrunner, has certainly used the austerity issue as a stick for beating his rival. He has also threatened to refuse to ratify the European “fiscal compact” agreed at one of last year’s many emergency summits unless various measures are taken to boost growth. Crucially, however, he is committed to a remarkably similar domestic fiscal path to that envisaged by M Sarkozy. Both men would see France’s budget deficit reduce to 3% of GDP by 2013 (from an expected 4.4% this year), and both want to balance the budget thereafter – though M Hollande would see this goal reached only in 2017, a whole year later than his opponent, and favours a 50:50 split between tax increases and spending cuts, as distinct from the radically different 35:65 split on the table at present.
At the European level, even the threat to scupper the fiscal compact would depend on failure to agree measures such as those in M Hollande’s four point plan for growth: eurozone-wide bonds for infrastructure projects, more lending by the European Investment Bank, a financial transactions tax and more efficient use of EU structural funds.
Now the idea of using EIB lending to stimulate growth appeared as far back as last July’s EU agreement over Greece, so this could be a serious runner. Chancellor Merkel has already indicated that the next EU summit, in June, will have a growth agenda. If M Hollande manages to secure backing for even one or two of his proposed ideas he would be able to present this as a transformative victory for a more pro-growth politics across the Continent – especially if more EU money for France should happen to be an incidental consequence of the plan. Having already accomplished his most important task – getting elected – his need to tear up the fiscal agreement would be greatly lessened. (This is certainly the way markets are betting, with French bond yields showing no signs of panic.)
The Greek situation is altogether more unpredictable. The electoral system is a model of proportional representation in action. Like the Spartan force at Thermopylae, the legislature has 300 members. 250 of these are allocated proportionately, with a threshold of 3% necessary to win the minimum 8 seats in parliament. The remaining 50 are awarded to the party with the most votes. That will almost certainly mean the centre-right New Democracy party of Antonis Samaras; with poll numbers in the low 20s, ND is several points clear of its nearest rival, the centre-left PASOK, at the head of a very divided field.
Now Mr Samaras has already committed himself, in writing, to Greece’s bailout terms, on the insistence of his country’s creditors. He intends to govern with the aid of PASOK in a continuation of the coalition which has been in place since the fall of George Papandreou last November. But the problem is that the main parties are so unpopular that even with that 50 seat bonus they might still struggle to achieve a majority. The communists, the other leftist parties and most of the nationalist right is against the austerity programme.
In other words, there is a more obvious worst case outcome for Greece. While the communists, nationalists etc. are highly unlikely to join a formal coalition against the political mainstream, they could easily unite to oppose specific votes / budgetary measures, holding out the prospect of fresh elections and constant political uncertainty into the bargain. Anything short of a clear majority for the main parties, therefore, could spell more market drama.
There are of course many observers who would like to see the country’s present rulers out of office, democracy restored, Greece out of the euro, austerity ended and the EU itself given an enormous bloody nose. Despite everything, however, while the most recent polls show that 60% of the electorate oppose an ND / PASOK coalition, 77% “would like the next government to do everything possible for Greece to remain in the euro area”. Whatever else it might be, the political situation in Greece is not that straightforward.
In conclusion, then, the French election over the weekend will be interesting. But the Greek elections could be important.