However, the experience of the past few weeks has suggested otherwise, as the French elections have destabilised financial markets. There has been further volatility in recent days due to fears about the US economy.
Should the impact of elections worry investors ahead of the US election in November?
It is true that, for the most part, elections usually do not move the dial for financial markets, barring a bit of short-term volatility. James Thomson, Rathbone Global Opportunities fund manager, sums up the view of many fund managers: “We are relatively agnostic of the political backdrop as long as we avoid the extreme ends of the political spectrum.”
This has been clear during the recent UK election, where the renewed stability ushered in by a comprehensive victory for the Labour party creates a benign backdrop, but little else.
Thomson says: “Where we own UK companies, we invest based on the merit of the business rather than making a top-down call on the UK. Our exposure to the UK economy remains small in relation to the fund, but we expect the outcome of the election to be supportive of our UK-listed businesses.”
The political shifts brought on by recent ballots, however subtle, could open up new prospects for investors in emerging markets.
It is a similar picture for many emerging markets. Once seen as most vulnerable to political disruption, most elections this year have passed without significant incident.
The Indian election caused a small wobble in financial markets, but they have regained their equilibrium as they have recognised that the Modi agenda remains largely in tact.
The M&G emerging markets team commented: “Despite initial concerns around heightened volatility as voting deadlines loom in major developed and emerging markets, financial markets, thus far, have generally kept their calm with almost half of the year behind us.
“Amidst this, we believe the political shifts brought on by recent ballots, however subtle, could open up new prospects for investors in emerging markets.”
When it matters
However, there are times when politics and economics collide, particularly in countries where government debt is problematically high. For many major economies, government finances are on a knife-edge, and these countries may be one Liz Truss moment away from a financial crisis.
This is what happened in France. France’s debt to GDP currently sits at 112 per cent, and repeated attempts to bring it down have not succeeded. The fear for financial markets is not that a far right government comes to power, but that political sclerosis makes tackling the deficit even less likely.
John Chatfeild-Roberts, investment manager on the Jupiter Merlin Portfolio range, explains the problem: “Bond market investors breathed a sigh of relief about the National Rally losing (its intended fiscal plans set alarm bells clanging in Brussels).
“However, depending on the outcome of the political horse trading in Paris to form a government and its ability then to push through policies, the outlook remains uncertain.
“The far left’s economic policies are just as alarming to Brussels and the bond markets as those of the far right; if pursued they would most likely cause investors to seek a ‘risk premium’ for lending to the French government.
“On the other hand, if France’s governing system becomes paralysed, little will be done to help overcome economic stagnation or reduce France’s very overstretched government finances.”
Inevitably, these concerns will impact certain sectors more than others. In the case of France, the banks have been in the firing line.
Seen as a proxy for the broader French economy, investors have worried about increased funding costs based on wider French credit spreads. France’s banks are particularly reliant on wholesale funding (as was the case with Northern Rock), which makes them more vulnerable.
The US election
This is likely to be a problem in the upcoming US election as well. US debt is currently 122 per cent of GDP, with neither side showing any inclination to address it. The Republicans want more tax cuts, while the Democrats want more spending.
While the US is afforded more fiscal leeway than many of its peers, markets’ patience may be tested.
The race itself is now on a knife-edge after President Joe Biden announced he will step down as the Democratic nominee, with Kamala Harris taking his place – so there remains significant uncertainty at this stage.
This is a greater danger for bond markets and the dollar than for stock markets. Nevertheless, there are risks around the imposition of tariffs and restrictions on trade should Donald Trump deliver on some of his wilder promises.
The Trump campaign has been light on detail and so it is difficult to make assumptions about economic policy.
The global technology behemoths of Apple, Nvidia or Amazon have shown themselves adapt at finding workarounds, but it would undoubtedly be disruptive for sectors such as autos, electronics, and retail. Tariffs could also be inflationary, potentially pushing up borrowing costs again.
That said, some economists see stronger growth under a Trump presidency.
George Brown, senior US economist at Schroders, says: “If Trump were to win the election, our expectation is that US growth would be stronger and inflation firmer. However, the Trump campaign has been light on detail and so it is difficult to make assumptions about economic policy.”
Some investors are maintaining a relatively defensive stance as a result. Steve Kelly, manager of the AXA Framlington American Growth fund, says: “We remain cognisant that interest rate increases impact the real economy with a lag and that there are still growth challenges ahead.
“Therefore, our belief is that earnings estimates for the more cyclical areas of the equity market are too high and that the current bullish sentiment is likely to be tested over the next 12 months. At the same time, we believe that interest rates are peaking, and valuation pressures should ease.
“Given that the American Growth strategy is tilted towards less cyclical growth companies, we expect both of the above trends to be beneficial over time.”
The French election has shown that high debt and political fragility can be a toxic combination, and can mean that politics exerts a greater influence than it might otherwise.
Bond markets will be in the firing line, but some equity sectors will be vulnerable as well.
Darius McDermott is managing director of Fund Calibre and Chelsea Financial Services
Read More: Politics might prove more meddling for markets than expected