Stock markets weaken from Paris to Mumbai under pressure from election results | Business

Elections have consequences on financial markets. But it's often difficult to predict what this means for investors.

Just look at France, where the threat of election losses for the president's centrist party recently sent the French stock market to its worst week in more than two years. Or India, where questions about the margin of victory of Prime Minister Narendra Modi's party sent Indian stocks from a 3.4 percent gain to a 5.7 percent fall and then back again. to a gain of 3.2 percent over a crazy three-day period. month.

“Elections have consequences,” Morgan Stanley strategists wrote in a recent report. “But when it comes to identifying these consequences for financial markets, it is easy to confuse noise with signal.”

Around the world, from Mexico to South Africa, surprising election results have recently shaken markets. And more is likely to happen, as more than half of the world's population heads to the polls throughout 2024, according to the BlackRock Investment Institute.

The July elections in the United Kingdom are fast approaching. Later this year, the US presidential election in November will trigger its own volatility in the markets. All this adds up to a lot of uncertainty for the financial markets which notoriously hate this situation.

The biggest aftershocks have rocked countries' stock markets, but it is in the traditionally sleepier bond market that the biggest threat may lie. Indeed, many of this year's surprise victories suggest that the winners could pressure governments to spend more, without raising the revenue to finance them.

Looser fiscal policies could make it harder for governments to repay their debts. Fearful investors are already punishing them by demanding higher interest rates before lending to them.

“The bond market's tolerance for fiscal profligacy is very low these days,” said Niladri 'Neel' Mukherjee, chief investment officer of TIAA Wealth Management.

In the upcoming US elections, the bond market could remain calm in a scenario in which no party wins the White House and both houses of Congress, Mukherjee said. But if one party takes control, making it easier to dictate fiscal policy, that could lead to sharp rises in U.S. Treasury yields in the bond market. This would make mortgages more expensive, increase the possibility of a recession and hurt stock prices.

“That’s exactly what I think,” Mukherjee said. “Not many people talk about the bond market and how it would respond.”

Take France. Earlier this week, bond investors were demanding 0.75 percentage points more yield to lend money to the French government over 10 years, compared to a similar loan to the German government, seen as a safer bet. A week earlier, before the surprise victory of far-right parties in the European Parliament elections, investors demanded just 0.48 percentage points of additional yield.

That may not sound like much, but it's a big deal in a bond market where investors only get a 2.36 percent yield by lending money to the German government over 10 years.

One of the challenges investors face is the difficulty of profiting from or protecting themselves from election results. Indeed, financial markets are constantly evolving based on who comes out on top in the voting. To get ahead of them, an investor would need enough foresight to know what the surprise outcome is that the markets are not anticipating.

A Republican victory in November, for example, could make higher tariffs and broader trade restrictions more likely, which could improve the fortunes of U.S. manufacturers. But their stock prices would already rise before November if traders saw the Republicans winning in the polls. And even if an investor correctly guessed a Republican victory, in a scenario where the rest of the market leaned otherwise, that investor would also need to know when these trade policies would go into effect to realize maximum profit. That's a lot to do.

Rather than trying to predict the impact of investments immediately after an election, many professional investors plan for what their investments will do years from now.

In India, for example, Prime Minister Modi's inability to secure a clear majority could slow some of his economic reforms. But the world's largest country still benefits from a young population, according to strategists at the BlackRock Investment Institute. It also continues to benefit from companies' long-term push to restructure their global supply chains after the pandemic showed the risks of over-reliance on China.

Additionally, the U.S. stock market has historically tended to rise regardless of which party controls the White House.

P.A.