- Australia became the most recent country to face potential gridlock after its weekend election brought the first hung parliament in 70 years.
- Australia's situation is emblematic of what's already happened in Europe, Japan, and is expected to happen in the US this fall.
- Increased gridlock reduces legislative uncertainty—and that's good for stocks.
Markets hate uncertainty, and nothing's more uncertain than a constantly morphing rule book. Investors hate not knowing what punitive tax or new regulation might be around the corner. Predictably, politicians worldwide responded to the financial panic and recession by doing what they do best (or worst): legislating. In the US alone this year, politicians pushed through heath care and financial regulation reform. Other countries have been similarly active legislatively. But the political winds seem to be shifting–in some places from left to right, and right to left in others. But most will end up in the gridlocked middle, and that's a good thing for stocks.
Australia is the most recent country facing potential gridlock. The Labor Party, under Prime Minister Kevin Rudd, took a hit in the polls this summer thanks to a misguided (and massive) mining tax. Rudd was subsequently ousted in June in favor of his deputy prime minister, Julia Gillard. Hoping to exploit a brief "honeymoon period" with voters, Gillard called elections for August 21st, well ahead of the April 2011 deadline. Labor won the most seats, but is short of a majority. Five seats remain undecided, but it's unlikely Labor wins all five, making Australia's first hung Parliament in 70 years quite likely.
Australia isn't the only government finding its hands tied by voters. In the UK, David Cameron's Conservative Party won the most seats in May elections—but not enough for a majority, resulting in Britain's first hung Parliament since 1974. In Germany, Prime Minister Angela Merkel's center-right coalition maintains power—but her popularity is waning, and her coalition lost control of the Upper House of Parliament in a May regional election. In the Netherlands, coalition talks for the first minority government since World War II continue two months after the election—the three negotiating parties would command only a slim majority. Belgium's coalition talks (between no fewer than seven parties) are ongoing 40 days after elections. In Italy, Prime Minister Silvio Berlusconi's party recently lost the support of a key coalition partner, leaving his party with a thin parliamentary majority and perhaps facing early elections.
The tale is much the same in Asia: Yukio Hatoyama resigned as Japan's prime minister in June. The next month, under his successor Naoto Kan, the Democratic Party of Japan (DPJ)-led coalition lost its simple majority in the Upper House, only months after losing its two-thirds majority in the key Lower House—making it impossible to pass legislation without significant negotiation and consensus. All this, leading up to US congressional elections in November where it seems increasingly likely Democrats will, at the least, face dwindling majorities in both houses of Congress—and with less concentrated power, we expect the recent regulatory push will slow.
It's normal for politicians to rush into action following big bear markets and recessions—but equally ordinary for a voter backlash against ruling parties who've run out of political capital. With more gridlock globally, legislative uncertainty should ease going forward—something markets are likely to cheer.