Brazil is key to the Ibex 35, Italy could aggravate the financial conditions of the ECB and in the US, if Biden loses control in both chambers, the reforms could be paralyzed
This autumn comes loaded with up to five events of a political nature with the potential to strongly mark the economic and market outlook for the coming months. The electoral factor weighs less and less on stock markets that are more concerned about a possible recession, the energy crisis and how central banks try to deal with these issues, but the truth is that in a context of inflation close to 10% in the large economies, these elections will be relevant depending on what proposals are offered to alleviate this panorama, be they tax aid, energy tax cuts or an increase in tax pressure for the sectors that benefit most from this situation, among others.
“The market does not usually handle regulatory and fiscal uncertainty well, and they will especially appreciate clear and serious proposals, which seek to shore up a complicated situation without destabilizing the country’s budget and weakening its currencies,” highlights the investment and portfolio management team at A&G Private Banking.
Starting from Europe, where on September 25 the Italians will vote for a new prime minister, going through the first round of elections in Brazil on October 2 and the US in November, where the mid-term elections are held. The new leader of the Tories in the United Kingdom will also be appointed (and as a consequence, the future British prime minister until the legislative elections in 2025), and the 20th National Congress of the Communist Party of China will take place.
General elections in Brazil
With the Bovespa signing a rebound of 18% from the lows in July and an annual balance of more than 6.5% -compared to the 12% yielded by the global stock market-, analysts believe that as the first round approaches, there could be significant outflows from both bonds and stocks. “This could put pressure on the currency and force the central bank to reluctantly continue its hike cycle to stabilize it. Compared to sharp political episodes like 2002 and 2014, movements in Brazil can be quite large and, at worst, In any case, the currency could lose between 30% and 50%,” says Ales Koutny, a manager at Janus Henderson.
The first round on October 2 and the second on the 30th of that month will be key for Spanish investors, since in this region heavyweights of the Ibex 35 such as e play, on average, close to 30% of their profit, and it is the European selective with the greatest exposure.
With polls in favor of Lula, the gap between the former president and the current president has narrowed in recent weeks after Bolsonaro increased spending on social assistance and pressured state oil company Petrobras to lower fuel prices. “Although neither of the two candidates would be celebrated by the market a priori, the market may prefer Lula’s victory, since he is a politician with many international relations compared to Bolsonaro’s disconnection,” says A & G.
Claudia Calich, an emerging fixed income manager at M&G, believes that the interesting thing if Lula wins will be “to see if a term of Lula 2.0 will be more like his first term (2003-2006), when he inherited a turmoil in financial markets and a large depreciation of the currency and managed to reassure them with orthodox appointments to his economic team and the approval of reforms, or if he will move closer to his second term (2007-2011), when the urgency to stabilize the economy was great lower and the reforms stalled,” he explains.
Early elections in Italy
The focus will first be on Rome. “As Europe and Italy are likely to enter a recession in 2023, elections and the policies of whoever forms a government will influence whether that recession is also associated with extreme financial stress in the bond and stock markets,” says Jeremy Lawson. , chief economist at abrdn.
Despite the uncertainty derived from the, the Ftse Mib has rebounded 6% since this date, two points more than the EuroStoxx, although in 2022 it falls 17%. Everything points to a victory for the bloc that brings together Brothers of Italy, La Liga and Forza Italia, but experts believe that this time leaving the eurozone is not on the table. Of course, they will take an opposite direction to that of Draghi.
“To be clear, this should not be an acute risk like we saw in the sovereign crisis, but we will almost certainly see a higher risk premium linked to Italian debt in this scenario, further aggravating the tightening of the Not forgetting that the monetary conditions emanating from the ECB has not been created explicitly to offset widening fundamental or political spreads, and therefore even the successful introduction of a credible tool at next week’s meeting will not be a salve in case of a confidence in government vote next week,” says Bethany Payne, fixed income manager at Janus Henderson.
‘Midterm elections’ in the US
The result of November 8 will determine whether the Democrats retain control in both houses of Congress, an issue that is not trivial, since the current majority has allowed the approval, despite the opposition, regulations such as the Inflation Reduction Act, focused on the climate, and which has supported the rebound in the stock market of renewables. “Many years of midterm elections were bad for the stock market, although it usually recovers in the following twelve months,” recalls A&G, adding that “historically, having a divided government is positive for the markets, since the chances of a produce substantial changes in fiscal policy would decrease drastically”.
On this occasion, the experts allude to the risk that a Republican victory in the House of Representatives or the Senate would entail, and that “it would paralyze legislative changes until after the presidential elections of November 2024,” Lawson defends. In the opinion of this expert, “although the midterm elections will not be decisive in determining the result, a divided government would keep fiscal policy in the background and leave all the weight of adjustment to the Fed.”
For Víctor Alvargonzález, director of strategy and founding partner of Nextep Finance, “if the result is really bad, the Democratic administration could interpret it as the most important thing for Americans is to lower inflation and therefore perhaps we have to rethink the use of sanctions as a weapon, given the consequences that the rebound effect of sanctions has on prices in general and energy prices in particular, or to what extent they prefer to focus on internal issues and not spend huge sums of money on conflicts external military forces. This could favor the search for some kind of ceasefire in Ukraine,” he argues.
20th CPC National Congress
Although the investment firms (which accumulates a penalty of 16% in the year) after Shanghai and Beijing eliminated some mobility restrictions, the next step is to assess the position that Xi Jinping adopts once he is confirmed for a third term.
“Markets will speculate widely on his new approach. With China significantly missing its growth target in the first two quarters of this year, renewed pressure on the economy will continue to put pressure on emerging markets. We believe that South Africa and Brazil, with exposure to China and have their own internal challenges, they will bear the brunt,” says Ales Koutny of Janus Henderson.
Andranik Safaryan, manager of MainFirst, does not expect China to abandon its zero-Covid policy at least until the end of Congress and while waiting, he is confident that “the Chinese authorities have the fiscal and monetary tools to stimulate the economy, and even do more if necessary,” he says. For the chief economist of abrdn, “how Beijing’s position changes to become less restrictive will affect the magnitude of any rebound in the current economic weakness, which in turn will influence the margin of the Chinese equity markets to obtain new gains.”
Tory primaries
The scenario in the United Kingdom is quite predictable, which has contributed to the Ftse100 adding 2% in the year. “It means the opportunity for the Conservative Party to move away from the populist style and return to the party the conservative character and greater seriousness and solvency, which will be very necessary for times that are considered very complicated and in which the British will have to face difficult situations and austerity,” says A&G.
For Koutny, “a new leader could bring some vigor to policy making, due to inflation and the country’s fiscal position we only see small adjustments available. It should not have a significant impact on asset prices,” he argues.
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