Political Theater: Global Edition

Three big global elections are on deck for Q3, and we’d suggest investors should keep an eye on them as politics can be an important factor in market outcomes—not just in their home country, but globally.

Political Thunder From Down Under

Australian politics took a bizarre turn Wednesday when Prime Minister Julia Gillard called a snap Labor Party leadership contest—with the condition that the loser retire from politics—and promptly lost to former Prime Minister Kevin Rudd, whom she’d ousted three years earlier. Rudd had already challenged Gillard and lost twice, but Wednesday’s contest came after opinion polls showed Labor could lose up to 35 parliamentary seats to the Liberal National Party (LNP) in August’s general election with Gillard at the helm. Rudd polls a bit better, and Labor seemingly believes they’ll keep more seats with him at the helm, but the LNP and its leader, Tony Abbot, are well ahead.

Gillard’s downfall stemmed largely from a flagging economy and wildly unpopular policy changes, like a carbon emissions levy and the Mineral Resource Rent Tax (MRRT)—a 30% tax on mining firms’ profits. Abbott has pledged to repeal both, which would be a small tailwind for Australia’s resource-heavy economy and Materials stocks (though likely insufficient to drive much outperformance). Though the MRRT didn’t create severe fundamental headwinds, as several loopholes greatly minimized firms’ tax burden, it did create some administrative headaches and perhaps disincentivized resource rent.

Germany Goes to the Polls

Germans will hit the polls in late September, when Chancellor Angela Merkel’s Christian Democratic Union (CDU) coalition fights for re-election against the Social Democratic Party (SPD) and their leader, Peer Steinbrück. The CDU currently polls just ahead of the SPD and its potential center-left coalition partners, but Merkel herself leads Steinbrück by 40 points.

Should Steinbrück and the SPD somehow make a comeback and win the contest, Germany’s relationship with the eurozone likely doesn’t change. Both parties are pro-euro, and the SPD has supported previous bailouts. While Merkel has seemingly softened her stance on European integration policy—taking more of a nationalist tone—this is most likely an attempt to curry favor with Germany’s rising euroskeptic movement. If she remains in office, it’s likely business as usual in Brussels, with Germany still compromising as needed to support the common currency.

Another Victory for Abe’s Party?

Japan votes again next month—this time to elect the upper house. Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP) remain wildly popular, and the Democratic Party of Japan and ultra-nationalist Ishin no Kai are floundering. If Sunday’s Tokyo Metropolitan Assembly elections are any indication—all LDP candidates were elected—the LDP likely takes the upper house as well, giving it control over both houses in parliament.

If that happens, Abe could have a better chance of implementing deep economic reforms. In his first reform package, announced earlier this month, was missing necessary but politically difficult changes, like significant corporate tax cuts and labor reforms—not surprising, considering Abe likely wanted to store up political capital ahead of the election. Since then, he’s claimed more reforms are forthcoming after the contest, and a strong majority in both houses could increase the likelihood he pursues difficult measures—though it’s uncertain he’ll have the clout or desire to challenge many vested interests blocking reform.

Abe also very likely still has his eye on other non-economic changes, like amending the constitution, which could distract him from economic change, just as they did during his first go-round as PM. Amending Japan’s anti-war clause remains his lifelong ambition, and if he believes he has enough clout to push it through after the election, reform could take a back seat—one big reason we remain skeptical of Japanese stocks.