Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks don’t favor any party, and partisan ideology invites bias—dangerous in investing.
While China and the Fed have stolen the show lately, the political scenes in several developed countries have quietly shifted recently. Another new prime minister in the Land Down Under! An outside party threatens to shake up Canada’s political establishment. The UK’s Labour Party has new leadership, and the birthplace of democracy will vote. Again. Seems like a lot of change! However, though the moves may seem like big shifts, the ripple effect on the economy and markets is limited.
Australia Has a New Prime Minister
The Lodge, home of Australia’s Prime Minister, looks ready to have a revolving door installed. After party members and cabinet ministers called for a Liberal Party leadership vote, Tony Abbott is out and Malcolm Turnbull is in—the fifth prime minister since 2007. However, Turnbull isn’t likely to ignite (or snuff out) his country’s current tepid growth streak. While the Land Down Under hasn’t suffered a recession[i] in 24 years, Australia’s commodity-heavy economy faces big headwinds from the global commodity supply glut. Growth is slowing, with Q2 2015 delivering 0.2% q/q (0.7% annualized).
Rivals seized upon this weak streak, and Abbott’s Liberal Party was polling behind Labor ahead of next year’s national elections. Concerned Liberal leaders did what Australia has done lately and called for a backroom leadership vote among Liberal MPs—leading to Turnbull’s sudden rise from Communications Minister to Prime Minister. That said, Abbott’s fall also isn’t a huge surprise in Australian politics. Since John Howard from 2004-2007, no prime minister has served a full term in office. Labor’s Kevin Rudd served from 2007 through 2010, when his own party dumped him in favor of Julia Gillard. Rudd returned the favor in 2013, arguing he stood a better chance against Abbott in national elections, which he promptly lost less than three months later. Turnbull steps in with some claiming his history in the private sector and strong business contacts make him the ideal choice to reverse the economy’s slowdown. But despite Turnbull’s “market-friendly” reputation, we don’t see Australia rebounding strongly unless he can singlehandedly reverse the recent rout in commodity prices.[ii] It’s all a little similar to commodity-heavy Canada: While both economies have strong financial systems and relatively healthy consumers, the commodity pinch is sapping growth, driving political upheaval.
Canada Prepares for Elections
Speaking of Canada, it is preparing for its own elections October 19. With the country facing similar commodity-driven headwinds, the economy is a central issue. Though the vote had long been loosely scheduled for some time in October, incumbent Prime Minister Stephen Harper—in office since 2006—broke with tradition and opened the campaign in the middle of the summer. By doing so, Harper launched the longest political campaign in Canadian history—a move some interpreted as an attempt to gain a spending edge. Harper argues his party is the established, steady presence the country currently needs, but recent reports suggest the Conservatives’ support is slipping, with some polls having them third behind the left-leaning Liberals and the hard-charging New Democrats (NDP)—a party that has historically placed third (at best) in most national elections before 2011. For the first time, NDP seems to have a legitimate chance to form a government, given surging poll numbers.
Now, it is worth noting poll numbers should be taken with a healthy dose of skepticism, given their recent track record: see the unexpected Conservative victory in the UK this past May or the surprising Republican sweep in US midterms last year. While the figures may not predict likely voters’ choice, it at least seems that this race is still wide open. With a big debate coming up, NDP’s Thomas Mulcair will have the opportunity to convince Canadians his upstart party—an outsider in the Canadian political scene until becoming the official opposition in the House of Commons following 2011’s vote—can lead the country. Mulcair has attempted to moderate on some of the NDP’s more extreme views, like their anti-free-trade stance. He is also trying to couple spending proposals that would increase government consumption fairly substantially with tax cuts and deficit reduction—a difficult balance, but something for everyone, we guess. The political calculus targets voters in the middle who (the NDP hopes) are tired of the Conservatives and Harper’s nearly 10-year tenure. But either way, like Australia, Canada’s economy faces a stiff headwind from weak commodity prices. Political factors are important, of course, but Canadian stocks seem more likely to be influenced by commodity prices than who wins next month.
UK Labour Has a New Leader
The UK’s Labour Party, the primary opposition party, elected a new leader last weekend: longtime Parliamentarian Jeremy Corbyn, largely considered an outsider in the UK’s political scene. Initially nominated (with support borrowed from other candidates) to widen the debate, Corbyn rallied the grassroots and gained the backing of key party donors, securing the win even though Labour lawmakers broadly supported the other three candidates. In Corbyn’s 32 years in Parliament, he has repeatedly rebelled against the party line, voting against the party’s leadership over 500 times since 1997. His policies also stray far from Labour’s Tony Blair-ish center-left stance, with his manifesto including nationalizing utilities and railways, raising taxes on businesses and the wealthy and increasing government spending (financed by the Bank of England, a plan called “people’s quantitative easing”). It all seems a rather stark departure from the middle-of-the-road tack Labour has advocated for two decades.
However, whether you’re a fan of Corbyn’s ideas or not, we suggest not drawing any grand conclusions about the future of UK Labour, let alone the UK in general, from his victory. For one, many key Labour MPs aren’t on board with his ideas and are already organizing inter-party opposition factions—Corbyn will have to win them over or risk losing his leadership. Several MPs refused to join his shadow cabinet, while others demanded concessions on national defense and campaigning to stay in the EU. Buta also, the UK just had a general election in May. The next contest isn’t until 2020. Some relevant questions: Will Corbyn even be Labour’s leader come 2020 and if so, what (if anything) did he have to give up to hold onto power?
Greece Hits the Ballot Box (Again)
Greece’s Syriza party—which has gone from the fringe to the establishment in less than a year—is currently running neck-and-neck with center-right New Democracy (ND) ahead of this Sunday’s general election. A month ago, Syriza splintered after its far-left faction voted against all bailout-related measures and eventually broke off to form their own party. In an effort to consolidate and renew his power, Tsipras resigned, dissolved Parliament (leaving a caretaker government in charge) and asked the President to call a new election just seven months into his four-year term. And why not! Back then, polls suggested Tsipras was the most popular man in Greek politics, with a nearly 70% approval rating. However, votes are just popularity contests, and popularity can be fickle. In the month since Tsipras gave up the Maximos Mansion, opinion polls show he has lost ground to ND’s Vangelis Meimarakis. One poll has Syriza and ND in a deadlock, while another has ND ahead by half a percentage point. Now, a good number of voters are still undecided, and as we said, election polling has had a spotty track record recently—like in July, when Greek voters rejected austerity in a surprise referendum, which Tsipras and Syriza expected to lose. But still, between all the back and forth in the polls and Tsipras’ avowed unwillingness to form a coalition with ND regardless of which party wins the most seats, many fear no one will be able to form a government, threatening the Third Greek Bailout. But whatever Sunday’s result is, it is unlikely to present a material risk to global stocks or the eurozone. As has been the case for a while, Greek contagion risk remains minimal, and the country is far too small to wallop a global bull market on its own, even if it Grexited. Nor is an inconclusive election terra incognita—Greece had one of those in 2012, followed by a widely feared revote. Despite a brief correction as the saga escalated (sound familiar?), global stocks pulled through just fine.
While elections and leadership flip-flops have grabbed headlines lately, the bigger story for global stocks is that most competitive economies globally remain gridlocked, decreasing the likelihood of big, sweeping legislative change. Coupled with underappreciated global economic growth and still skeptical investor sentiment, to us this bull market looks likely to have plenty of life left.
[i] Using the widely accepted definition of two consecutive quarters of economic contraction.
[ii] And if he had such powers, we question his career choices.