Editors’ Note: MarketMinder Europe favours no political party nor any politician. We assess political developments for their potential economic and market impact only.
When it comes to European politics right now, if headlines in the financial publications we follow are any indication, most of investors’ attention is focussed on Ukraine and the prospect of a Russian invasion. Yet there are also some fresh developments on the traditional political front, which we think are contributing to elevated early-2022 stock market uncertainty. Italian lawmakers have now gone through four rounds of presidential voting and are no closer to selecting a (somewhat ceremonial) head of state. Portugal holds a snap election Sunday. France’s late-April presidential contest is heating up. All three, in our view—along with Australia’s upcoming general election—could very well contribute to stock market jitters in the near term, but we think they probably also create opportunities for falling uncertainty to be a tailwind for markets in much of the developed world later this year. Let us explore further.
Inside Italy’s Stalemate
Italy’s presidential voting process, which began Monday, is significant to many commentators we follow not because the presidency is powerful, but because one of the candidates is Prime Minister Mario Draghi, who was appointed last year. Having largely finished his job of shepherding through legislation earmarking where COVID relief funds will go, he has started angling for the ceremonial head of state position.[i] But if he gets it, it would leave Italy without a prime minister, potentially collapsing the broad coalition government he led—and likely bringing old divisions between the anti-establishment Five Star Movement, nationalist League and the traditional centre left and centre right to the fore. At the moment, this appears to be an anathema to lawmakers, as the biggest vote getter in Thursday’s fourth round of voting was a blank ballot.[ii] So far, the person winning the most votes was outgoing President Sergio Mattarella, who has said repeatedly he doesn’t want a second term.[iii]
We would suggest not reading too much into this, as parties appear to be treating the first few rounds as a mere formality, running out the clock whilst party leaders negotiate on a consensus candidate to get behind. The first three rounds required a two-thirds majority for the winner, but the threshold dropped to a simple majority from Thursday onward. Hence, most observers we follow say the real fun is only now starting.
However this shakes out, we don’t think it is hugely consequential for Italian stocks. With or without Draghi at the helm, Italy’s Parliament will probably remain gridlocked. No party has anything close to a majority, and government formation requires parties with big ideological divergences to join forces.[iv] The League and Five Star Movement’s coalition got very little done, with both parties’ major campaign pledges largely failing to come to fruition. Five Star’s subsequent coalition with left-leaning parties was similarly inactive, with the pandemic preoccupying its brief reign. A new election might be more decisive, as it would be the first under the reformed electoral laws that were designed to slim Parliament and make it easier to win a majority.[v] But there doesn’t appear to be much appetite for this amongst the major parties, as the far-right Brothers of Italy party has soared in polling over the last year—and many politicians likely don’t want to trigger an election that sheds seats and jeopardises their jobs.[vi] In our view, all evidence points to a squabbling, do-little government, which has been just fine for Italian stocks in recent years—and which should eventually bring some relief to the present political jitters.[vii]
The Political Plot Twist in Portugal
Portugal’s legislature is similarly fragmented, with Sunday’s snap election likely to return another hung Parliament, if the latest polls are any indication.[viii] The outgoing government—in which two far-left parties propped up the centre-left Socialist Party’s (PS) minority government—collapsed in November when it couldn’t pass a budget. Support for the far left has dwindled, whilst a new hard-right populist party called Chega has gained traction—a shift from recent years when Portugal cut against the trend of rising populism across Europe.[ix] Chega’s founder and leader, André Ventura, is a former football pundit turned politician who broke from the centre-right Social Democratic Party (PSD) a few years back. Now that the PSD has narrowed much of its polling gap with the PS, Ventura is positioning himself as kingmaker and potential deputy prime minister in a right-leaning coalition.[x] Accordingly, many financial commentators we follow now warn of right-wing populism potentially destabilising Portuguese politics.
We don’t think this is likely, though. For one, whilst polls often aren’t predictive, given the PSD and Chega combine for only 39% of the vote, it appears highly unlikely that a right-leaning coalition could win an outright majority.[xi] More likely, they would win a plurality and form a very weak minority government—basically a right-leaning version of the left-leaning administration that served since 2019. When that government took power, financial commentators we follow warned it would undo hard-won reforms passed during the last decade’s debt crisis, wreaking havoc on Portugal’s economic competitiveness. But that proved false, with 2021’s labour market reforms focussed on setting boundaries for remote workers.[xii] On the economic front, Portugal’s post-pandemic rebound has largely echoed its neighbours, with Gross Domestic Product (GDP, a government-produced measure of economic output) finishing Q3 2021 just -3.2% below the pre-pandemic high (the latest figure available as we write).[xiii]
Overall, our research shows gridlock blocked radical change under the left-wing administration, and we think it would likely do the same under a right-wing minority administration if that indeed came to pass. If you are a fan of flat taxes, you might find this disappointing, as that was one of Ventura’s key economic pledges. But for those investors who shudder at the word populism, it should bring a sigh of relief.
Rumblings Grow Ahead of April’s French Presidential Election
France doesn’t vote until mid-April, but sparks are already flying amongst the candidates—particularly on the right. Incumbent Emmanuel Macron, of the new(ish) centrist La Republique En Marche (LREM) party, is presently leading in polls at 24%, potentially positioning him to be the first French president in eons to win re-election.[xiv] But he is in pole position largely because the right is fragmented. Valérie Pécresse, the candidate for the centre-right Les Republicains (LR), is tied with Marine Le Pen of the right-wing National Rally (RN) at 16% each, followed by an independent right-wing commentator named Eric Zemmour at 13%.[xv]
This is where we think it gets interesting. Once upon a time, many commentators we follow saw Le Pen as the right-wing agitator and populist threat. When she faced Macron in 2017’s presidential runoff, her platform included leaving the euro. But when that proved unpopular, she started tacking more toward the traditional centre-right, continuing her long-running efforts to reform and soften her party (initially founded by her father as a fascist movement). That apparently created the opening for Zemmour, who has assumed many of Le Pen’s prior positions. Now the two, who one might think are ideological allies, appear to be at each other’s throats, with each urging the other to drop out.
In France, if no candidate wins an outright majority in 10 April’s first-round vote, the top two finishers face off in a 24 April runoff. That contest’s happening seems like a foregone conclusion, but it is anyone’s guess, in our view, which of the right-leaning challengers Macron will face. Forecasting the outcome also seems like a tall order, especially since a contentious first round could affect whether the right can unite behind a single candidate two weeks later. Political commentators we follow think Pécresse has the best shot against Macron in a runoff, but if Le Pen erodes enough of her support, she may not get the chance.
We think there will be a lot of chatter about this for the next few months, with the rhetoric likely getting increasingly hot. That will likely stir uncertainty, much like we have found US elections do. But come late April, we will get clarity, and just knowing the victor is likely to let markets move on, in our view. June’s Parliamentary election will probably add further clarity, letting markets handicap the likelihood of the eventual presidential winner pushing through their agenda. In our view, this likely contributes to falling political uncertainty globally later this year—a tailwind we think few seem to appreciate today.
[i] “Italy Votes for New President in a Race That Could Spark Political Upheaval,” Holly Ellyatt, CNBC, 24/1/2022.
[ii] “Hopes for Friday Deal in Italy’s Presidential Election,” Alvise Armellini, Anadolu Agency, 27/1/2022.
[iv] Source: Italy Chamber of Deputies, as of 27/1/2022.
[v] “Italians Vote to Slash Parliament by a Third,” Staff, BBC News, 22/9/2020.
[vi] Source: Politico, as of 27/1/2022.
[vii] Source: FactSet, as of 27/1/2022. Statement based on MSCI Italy returns in GBP with net dividends.
[viii] See Note vi.
[xii] “Portugal Makes It Illegal for Bosses to Contact Employees Outside Working Hours,” Vicky McKeever, CNBC, 15/11/2021.
[xiii] Source: FactSet, as of 26/1/2022.
[xiv] See Note vi.
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