Three Quick Hits on International Politics

Editors’ Note: MarketMinder Europe prefers no politician nor any party. We assess developments for their potential market impact only.

Summer may be chock-full of holidays and boredom in global politics, but spring seems to be the season of things happening. The past few days brought a flurry of activity, with elections in Emerging Markets Poland and South Korea and a government collapse in the Netherlands, likely setting up a snap election. In our view, all fit with this year’s general themes of gridlock and falling uncertainty, likely benefitting international stocks.

Here Comes Another Dutch Election

The Netherlands’ fragile, four-party coalition government splintered Tuesday, after the populist Party for Freedom’s Leader Geert Wilders pulled his support.^[i] The issue that set Wilders off is a longstanding divide between his party and the rest of the coalition over policing and controlling immigration.^[ii] This particular debate is what we consider sociology—important to society but beyond markets’ purview, based on our research. In our view, it is more relevant that this government collapse led to Prime Minister Dick Schoof’s resignation, which likely tees up a snap election.^[iii]

For markets, we find snap elections ordinarily increase political uncertainty—and we guess that holds here to an extent. But this is also basically the status quo in the Netherlands. This coalition only ruled for 11 months, barely longer than the 223 days it took to form it—and the government didn’t pass much significant policy.^[iv] Maybe the results from the next vote speed up government formation, but polling from Ipsos suggests another splintered Parliament is likely, perhaps even more fractured than the current, as the New Social Contract party looks to have virtually disintegrated after its founder and leader resigned in April.^[v]

That said, whether there is a caretaker prime minister in power like the present—or a coalition of parties doing little more than going along to get along—political gridlock likely reigns after the next election, which our research finds is a fine thing for a competitive, developed economy like the Netherlands’. Experience tells us voters typically dislike gridlock, but our research suggests inactive governments tend to keep legislative risk low, giving businesses latitude to take risk and invest.

South Korea Gets a New President

The political uncertainty that erupted from former South Korean President Yoon Suk Yeol’s martial law declaration last December (which resulted in his impeachment and which the Constitutional Court later ruled illegal) has seemingly finished falling at last, with the election to choose his successor now complete.^[vi] As polling foretold, the centre-left Democratic Party’s (DP) Lee Jae-myung won handily.^[vii]

Much of the coverage we saw focussed on Lee’s personality and long-running legal issues—more sociology, in our view. In our view, markets generally look past such things and focus on policy, particularly economic policy. And on that front, the status quo looks likely to continue. Lee’s campaign pledges focussed on fostering economic growth, cutting red tape and reforming the chaebol system that has made it difficult for small and midsized businesses to compete with the country’s giant conglomerates.^[viii] All of these sound nice, in our view, and would address longstanding complaints we have observed amongst investors. But they echo pledges from past leaders of both main parties … pledges that haven’t resulted in much action.^[ix] Similarly, Lee has made it a priority for South Korea to win a promotion from MSCI’s Emerging Markets staple to developed market status, but the reforms to do this are slow-moving and already in progress.^[x]

So overall, we doubt much changes. A massive tax-and-spend push, which financial commentators we follow previously warned of when the DP took power, doesn’t appear to be on the agenda. The DP has a solid majority in the National Assembly, theoretically making legislation easier to pass, but we think tariff negotiations with the Trump administration probably garner the most energy for now.^[xi] And given past presidents haven’t been able to pass meaningful chaebol reform despite having majorities in the National Assembly, we doubt much happens on that front.^[xii]

Hence, we think the most significant takeaway from the election is likely that it happened, ending the remaining uncertainty and letting investors move on. Not that markets waited, given Korean stocks are up since the saga began, but we find sometimes sentiment benefits from having closure on these situations.^[xiii]

Poland Gets a New President, Too

Rounding things out, Poland also elected a new president, with the Law and Justice Party’s Karol Nawrocki edging out Warsaw Mayor Rafal Trzaskowski in Sunday’s runoff.^[xiv] This puts the presidency seemingly at odds with the legislature, given Law and Justice is a nationalist party whilst Prime Minister Donald Tusk and his coalition government are traditionally centrist, hence we have seen a lot of talk about the election pulling Polish politics in competing directions.^[xv]

But policy-wise, we think this election extends the status quo. Poland’s president doesn’t set the legislative agenda but does have veto power, and overturning a veto in the legislature requires a three-fifths majority.^[xvi] Tusk’s government doesn’t have this and was vetoed an awful lot by outgoing President Andrzej Duda, an independent who allied with Law and Justice.^[xvii] Tusk couldn’t override those vetoes, and we suspect it will just be more of the same under Nawrocki.

Which, in our view, is all fine for stocks. Onlookers may see room for improvement in Poland’s economic policy, but markets are already doing just fine with the status quo, benefitting from Europe’s broader outperformance.^[xviii] Emerging Europe tends to get a nice halo effect when developed Europe does well, and we think extended gridlock merely clears the runway for this to continue.^[xix] If a snap election results from Tusk’s decision to call a confidence vote, we could see uncertainty spike, but given commentators we follow already broadly questioned how long his disparate coalition could survive, we doubt markets would be hugely surprised.