Fisher Investments Editorial Staff
Politics

Topsy-Turvy Politics Aren’t Just Made in America

By, 11/14/2016
Ratings264.25

America elected its next president last Tuesday. That’s a yuuuge deal.[i] Outside the US, meanwhile, other nations face their own political trials and tribulations. Some are “politics as usual,” while others are downright scary—reminders that a lot is happening beyond our shores, both in developed nations and Emerging Markets (EM). For investors, it is vital to tune out the noise and focus on what—if anything—is actually changing. Despite the chaos, the rule of law is still alive and well in developed countries, and besides some tiresome theatrics, those governments are mostly gridlocked—an underappreciated bullish political driver. Emerging Nations are (as usual) iffier, but the issues seem isolated.

Brexit Goes to Court

The London High Court ruled in early November that Parliament must weigh in before Britain can trigger Article 50 of the Lisbon Treaty—the formal mechanism that kicks off the two-year period for EU exit negotiations. This wrinkle has prompted speculation Brexit may not happen, but that’s premature. This (and related cases) now go to the UK’s Supreme Court, and even if the London ruling holds, it seems unlikely Parliament goes against the people’s will.

After the UK voted to leave in June, some challenged the decision’s legal standing. In late October, the High Court in Belfast ruled against two cases that argued the UK government couldn’t invoke Article 50 unilaterally. One cited a prior agreement (the 1998 Good Friday Agreement) and argued devolution meant Westminster couldn’t force Northern Ireland to leave the EU. Period. Another suggested the UK government can’t trigger Article 50 without Parliamentary approval. The judge rejected both arguments. However, a British businesswoman’s argument for Parliamentary approval was successful in London’s High Court.

The government said it would appeal to the Supreme Court, which will hear the case in December and plans to make its ruling early next year. Appeals of the Northern Irish cases will likely be folded into this hearing, which will be a doozy. Scotland’s First Minister, Nicola Sturgeon, has asked to be heard during the proceedings. She plans to argue triggering Article 50 would deprive the Scottish people of their rights—Scotland voted to remain—and thus, the Scottish Parliament’s approval is necessary, too. The Welsh Government has also applied to participate in the hearings, focusing on “the use of prerogative power to take steps which will or may impact” the Welsh Assembly’s powers and relationship with Westminster as well as Welsh society. Northern Ireland’s First Minister, Arlene Foster, has kept mum on her plans, but Northern Irish surrogates are pushing for the Court to take up the Belfast case.

While this could undermine Prime Minister Theresa May’s plans for starting Brexit talks in March, it doesn’t necessarily imperil Brexit.[ii] Though many MPs wanted to remain in the EU, they also are cognizant of their constituents—a majority 52% voted to leave, after all. Overturning the people’s will would be political suicide at the next general election. Though we don’t know how the UK Supreme Court will ultimately rule, this episode shows deadlines and timelines can always shift when it comes to politics. In the meantime, continued Brexit focus probably means gridlock—not unlike Prime Minister John Major’s tenure in the 1990s, when he held a razor-thin majority and ultimately couldn’t do a whole lot while his MPs squabbled over Europe. 

Italy Has Its Own Referendum

In December, Italians will vote in a referendum on electoral reform, which may decide Prime Minister Matteo Renzi’s future. Italy’s legislative morass has consistently prevented labor market reforms and other key modernizing measures, so these proposed changes seek to streamline the process by cutting the number of Senate seats and giving the lower house more power. Renzi staked most of his political capital on this cause, at one point proclaiming he would resign if the referendum failed—a pledge he has already walked back.

Some think that because polls show the referendum won’t pass, this bodes ill for Italian politics. However, a quarter of those polled are still undecided, so the epitaph is premature. Plus, for better or worse, political instability is the status quo in Italy. If the referendum fails and Renzi goes the way of Enrico Letta, Mario Monti, Silvio Berlusconi and Romano Prodi—Italy’s four other PMs since 2011—this shouldn’t wallop markets. Rather, it would usher in a new government, either technocratic or fragmented, that would be gridlocked because these changes didn’t pass. That’s true whether or not the anti-establishment Five Star Movement comes to power nationally, which polls imply might happen. Gridlock might prevent further reforms, but it would also forestall sweeping legislation that could bring unintended consequences.

A Korean Rasputin?

The happenings in South Korea are a bit more unusual than a couple court cases and a referendum, as President Park Geun-hye is embroiled in an extraordinary political scandal. Choi Soon-sil, a friend of Park’s and daughter of a man whose relationship with Park resembles Rasputin and Tsarina Alexandra Romanov, is accused of using her association with the Blue House[iii] for personal power and financial gain. Choi also had access to, and was consulted on, government policy—despite having no experience or authority to do so. The wild story, which you can read more about here, has shocked Koreans, who are already extremely jaded toward their pols.

This scandal probably won’t lead to Park’s impeachment. Korean presidents can be impeached only for violating the constitution or laws, not acts of questionable morality, incompetence or mistakes. Yet her ability to govern meaningfully is likely over. As shocking as this story is, it needn’t derail positive drivers underlying one of Asia’s most advanced economies. Chaebol (Korea’s mega-conglomerates) inefficiencies aside, steady domestic consumption has boosted the economy, which is already pretty competitive. It was unlikely Park would reform the chaebol, so gridlock extends a status quo that markets today are fine with.

Strongmen in Turkey and the Philippines

More troublingly, in Turkey and the Philippines, authoritarian strongmen have been making waves. In Turkey, President Recep Tayyip Erdogan is on a path to be the most dominant politician in the republic’s history. Most recently, he jailed leaders of the Kurdish People’s Democratic Party—who have resisted his power play—through a series of midnight raids. Erdogan’s Justice and Development Party (AKP) has said it will soon adopt a new constitution that would create an executive presidency, bolstering his already considerable power. Meanwhile, Philippine President Rodrigo Duterte has expanded his bloody war on drugs from Davao City (where he was mayor) to the nation, letting police use deadly force on alleged drug users without due process. By some estimates, more than 4,000 people have been killed since Duterte launched his campaign after winning the presidency in May.

We aren’t sugarcoating anything: There isn’t anything good about these stories (though local markets have proven resilient). However, they provide a keen reminder that there are always problems and trouble around the world. Always has been and always will be. Markets know this, digest it and move forward. They’re callous in that regard, but from an investment point of view, folks can’t let those problems sway them from their strategy—especially since we don’t envision a time when there won’t be horrific, terrible things happening somewhere.

There are other notable stories, too. Thailand is preparing to transition power to the crown prince after its longstanding king passed away. Lawyers in Hong Kong are protesting China’s recent intervention in the special administrative region’s legislature. While stories of discontent and transition can be troubling, the genuinely worrisome parts of the world also aren’t in the majority. Say what you will about politics in the developed world,[iv] but the rule of law remains firm. Hillary Clinton conceded the election and urged support for the new president-elect, who met with President Obama last Thursday in what was reportedly a cordial meeting. The British government is appealing the court’s decision rather than outright ignoring or dismissing the ruling. Renzi is leaving the decision to the people. Koreans are protesting against Park, but they haven’t violently removed her from office. Compared to places like Venezuela, this shows why markets prefer places where the rule of law is strong. And while a strong rule of law shouldn’t be assumed to be a given, it doesn’t appear likely to deteriorate any time soon.

 

[i] Sorry.

[ii] Friendly reminder: We don’t prefer one side over the other. We gauge Brexit on its economic, not political or sociological, impact, and so far, nothing on this front has changed. It could when negotiators start talking and agreeing to things, but until then, nothing about the British economy is fundamentally different.   

[iii] Korea’s answer to America’s White House.

[iv] Believe us, we have.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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