Editors’ Note: MarketMinder Europe favours no politician nor any political party anywhere. We assess political developments for their potential economic and market impact only.
When it comes to politics, pretty much all eyes in the financial world appear to be on Sunday’s French election. We will have more to say about that after the fact, but in the meantime, here is a cocktail of other political snippets (and what we think are their stock market implications) to wet your whistle.
Boris Johnson Pays Fine, Says Sorry, Remains Employed
Not long ago, UK Prime Minister (PM) Boris Johnson was hanging on to his job for dear life as the scandal known as Partygate threatened to bring him down. Even when the official government inquiry was circumspect about whether the PM had broken the rules, many financial observers presumed that if Partygate didn’t bring him down, the cost of living crisis would as voters absorbed the pain of stealth tax hikes and fast-rising consumer prices.[i]
That was in February. And now? Last week, the police found Johnson violated lockdown rules and slapped him with a fine.[ii] Polling showed a majority of voters thought he should resign.[iii] He issued a long-winded apology to the House of Commons and wears the dubious distinction of being the first sitting PM to be found in violation of the law.[iv] Yet we think his job looks safe. Some influential Conservatives have withdrawn their calls for a party leadership vote.[v] Chief rivals don’t appear to be sharpening their knives anymore, as far as we can tell.
You see, some things have happened in the interim. Vladimir Putin invaded Ukraine, and Johnson has been at the forefront of the West’s sanctions-orientated response. That has seemingly helped boost his approval rating by several points and narrowed Labour’s polling lead a smidge.[vi] The general consensus amongst Conservatives now seems to be that changing horses midstream would boost Putin and weaken the UK’s international standing.[vii]
Meanwhile, rising living costs are hitting people hard.[viii] But we think it seems to be hurting would-be challenger Rishi Sunak, the Chancellor of the Exchequer, more than Johnson. Because Sunak released the Budget, he has worn much of the popular blame for the stealth tax hikes.[ix] Those hikes took effect as it came to light that his wife has non-domiciled individual (or non-dom) status, which enabled her to avoid paying UK taxes on huge dividend payments from Infosys, which her father founded and she holds a large stake in.[x] She eventually pledged to stop using this status and pay full British taxes, but the political damage was done.[xi] That, plus Sunak also receiving a fine for breaching lockdown rules, seemingly killed his leadership hopes for now—and made his candidacy as a Johnson replacement seem like a stretch.[xii]
There is a lot of sociology here, in our view. We won’t wade into any of it, because we don’t think stocks do. Rather, we think they care primarily about uncertainty. These latest developments appear to have eased it quite a bit, in our view. We think markets are getting clarity about Johnson’s staying power, enabling them to move on from the will he stay or go? question. Meanwhile, we think his weakened political capital likely raises gridlock, reducing the legislative uncertainty that our research finds would ordinarily accompany a government with a majority as big as the Conservatives’. In two weeks, we will get local election results, which are likely to give more insight into how Johnson’s adventures affect his party’s grassroots popularity. Soon after that, a by-election in West Yorkshire will likely show whether Johnson’s popularity endures in the Red Wall of longtime Labour seats that flipped in 2019.[xiii] (It could also deliver high entertainment, if reports that Ed Balls—the former cabinet minister who once tweeted his own name, went viral on Strictly Come Dancing and dazzled even the great Mary Berry on Celebrity Best Home Cook—plans to enter the race are true.)
As these events come and go, we think uncertainty is likely to tick down further. In our experience, when uncertainty falls, it gives people more breathing room to take risk and gives stocks a few less things to stew over. That doesn’t mean UK stocks will continue to outperform global markets, in our view, as their early 2022 burst seems tied to the UK stock market’s being heavy on Energy and light on Tech.[xiv] But we think it is likely to contribute to falling-uncertainty tailwinds globally.
Australians Get Ready to Plug Their Noses and Vote
If you get cranky when an election is a choice between two unpalatable candidates, spare a thought for our friends in Australia, who will hit the polls on 21 May. Their main choice will be between incumbent Prime Minister Scott Morrison’s Liberal-National Coalition (L-NC) and the Australian Labor Party’s Anthony Albanese—or, as they are known locally, ScoMo and Albo. Both men have net negative approval ratings, and polls show either party will struggle to cobble together a majority.[xv] It seems to fit with famous Aussie author Donald Horne’s description of Australia as “a lucky country run by second-rate people who share its luck.”[xvi]
Polls do show Labor a few points ahead of the L-NC, but we wouldn’t make too much of it.[xvii] Australian polls also showed Labor leading before 2019’s election, but the L-NC took 77 of the House of Representatives’ 151 seats, versus just 68 for Labor.[xviii] Political observers we follow doubt pollsters have fixed the issues that led them to overestimate Labor voters’ turnout and underestimate support for the L-NC, which tends to do better amongst older demographics. Bookies recently cut the odds on an L-NC win dramatically, but anything can happen in a month, and neither side has this sewn up, in our view.[xix]
Whatever the outcome, we think all signs point to falling uncertainty and gridlock here, too. Maybe the L-NC or Labor manages to eke out a tiny majority. Maybe voters deliver a hung Parliament, giving the country either a shaky coalition or minority government. We think that could tee up further turns of Australia’s infamous revolving door, which once inspired an entrepreneur named Gwen Blake to design and sell tote bags saying, “Ban the Single Use Prime Minister.”[xx] We think precious little legislation would likely pass in any of these scenarios, extending gridlock.
Speaking of Shaky Coalitions
Last year, after four inconclusive elections in less than two years, Israeli politicians managed to cobble together an eight-party coalition whose participants agreed on little besides a general desire to sideline former PM Benjamin Netanyahu.[xxi] As part of the power-sharing deal, right-wing Yamina Party leader Naftali Bennett became PM and agreed to swap places with centrist Yesh Atid party leader Yair Lapid after two years … if the government survived that long.[xxii]
That is increasingly in question, based on some recent developments. Earlier this month, the coalition lost its majority when its chairwoman, Idit Silman, resigned, denouncing the compromises Yamina had to make to stay in government.[xxiii] That left the coalition with 60 seats in the 120-seat Knesset—a number that might drop further when the chamber reconvenes in May.[xxiv] The Ra’am party, which is the first Arab party to join an Israeli government, has threatened to quit the coalition over disagreements on the handling of escalated violence around holy sites.[xxv] If even one member of it or any other party walks, it would leave the coalition vulnerable to a no-confidence vote.
In our view, it isn’t at all clear how this will resolve. The violence puts religious identity and national security front and centre, which we think could heighten rhetoric from the coalition’s disparate parties and dissolve their unity. Then again, many political analysts we follow think the violence was tied to the rare overlap of Ramadan and Passover, which will be over by the time the Knesset reconvenes on 8 May. That could be enough time for things to simmer down and extend the status quo, in our view.
Either way, we don’t see the bigger picture changing. Israel has had deep gridlock and periodic political uncertainty for years. We think markets are quite used to this cycle. Moreover, Israel’s market is tiny, with just 16 constituents—4 of which represent almost half its market capitalisation (the value of a company’s shares outstanding).[xxvi] That likely makes company-specific drivers and global sector trends a larger driver of returns than local political fundamentals, in our view.
[i] “Sue Gray’s Initial Findings on Parties Published,” BBC News, 31/1/2022 and “The Cost of Living Crisis – Who is Hit by Recent Price Increases,” Peter Levell and Heidi Karjalainen, Institute for Fiscal Studies, 17/11/2021.
[ii] “Police Fine Britain’s Boris Johnson and Rishi Sunak for Attending Parties in Lockdown,” Frank Langfitt, NPR, 12/4/2022.
[iii] “Snap Poll: Following Lockdown Fines, Most Say Boris Johnson Should Resign,” Connor Ibbetson, Isabelle Kirk, YouGov, 12/4/2022.
[iv] “PM Statement: 12 April 2022,” Prime Minister Boris Johnson, United Kingdom Government, 12/4/2022.
[v] “Scottish Tory Leader Withdraws Letter of No Confidence in Boris Johnson,” Jessica Elgot, The Guardian, 10/3/2022.
[vi] Source: Politico, 21/4/2022.
[vii] “Good, Bad and the Ugly: How Boris Johnson’s future May Play Out,” Jessica Elgot, The Guardian, 15/4/2022.
[viii] Source: Office for National Statistics, as of 21/4/2022. Statement based on UK Consumer Price Index (CPI), March 2022. CPI is a government-produced index tracking prices of commonly consumed goods and services.
[ix] “Rishi Sunak Accused of Imposing £21bn ‘Stealth Tax’ on UK Workers,” Richard Partington, The Guardian, 16/3/2022.
[x] “Rishi Sunak Faces Questions Over Wife Akshata Murthy’s Non-Dom Tax Status,” Staff, BBC News, 7/4/2022.
[xi] “UK Minister’s Wife to Pay Taxes on Worldwide Income Amid Row,” Nebianet Usaini, BBC News, 9/4/2022.
[xii] “Police Fine Britain’s Boris Johnson and Rishi Sunak for Attending Parties in Lockdown,” Frank Langfitt, NPR, 12/4/2022.
[xiii] “General Election 2019: How Labour’s ‘Red Wall’ Turned Blue,” Daniel Wainwright, BBC News, 13/12/2019.
[xiv] Source: FactSet, as of 21/4/2022. Statement based on MSCI UK IMI sector weightings, MSCI World Index returns in GBP with net dividends and MSCI UK IMI total returns in GBP.
[xv] “Guardian Essential Poll: Labor Loses Ground in First Week of Campaign but Ahead of Coalition,” Katharine Murphy, The Guardian, 19/4/2022.
[xvi] The Lucky Country, Donald Horne, Penguin Books, 1964.
[xvii] “Guardian Essential Poll: Labor Loses Ground in First Week of Campaign but Ahead of Coalition,” Katharine Murphy, The Guardian, 19/4/2022.
[xviii] “The 2019 Federal Election,” Parliament of Australia, 29/6/2020.
[xix] “Federal Election: Coalition $1.85 Favourites After ‘Remarkable’ 72 Hours of Betting,” Nick Whigham, Yahoo! News, 18/4/2022.
[xx] We bought one, natch.
[xxi] “Explainer: Who’s Who in Israel’s New Patchwork Coalition Government,” Ari Rabinovitch, Reuters, 14/6/2021.
[xxiii] “Israel’s Coalition Government Loses Its Majority as Right-Wing Lawmaker Quits,” Elliot Gotkine and Michael Schwartz, CNN, 6/4/2022.
[xxv] “Ra’am Freezes Its Coalition and Knesset Membership Amid Temple Mount Tensions,” Staff, The Times of Israel, 21/4/2022.
[xxvi] Source: FactSet, as of 21/4/2022. MSCI Israel Index.
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