The Real Significance of Local Elections for Investors

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no party nor any candidate in any country and assess political developments for their economic and market impact only.

Apparently we published our midyear overseas political update a mite too early, as the last five days have been rather busy in European politics. Today brought the collapse of Sweden’s minority coalition government, which lost a no-confidence vote in Parliament, giving Prime Minister Stefan Löfven a week to decide whether to resign and let other leaders try to form a new coalition—or call a snap election. That doesn’t change a lot, considering gridlock reigned before today, and that trend isn’t likely to change regardless of Löfven’s next move. This may be why headlines have paid much more attention to developments in England and France. In the former, Prime Minister Boris Johnson’s Conservative Party lost a by-election last Thursday in a seat it won by 29 points in 2019. Then, in France’s regional elections, President Emmanuel Macron’s La Republique en Marche (LREM) party got trounced on Sunday, with the center-right Republicans strengthening their grip in most regions and Marine Le Pen’s National Rally taking Provence. Pundits globally are reading into these contests as bellwethers for each country’s next national election—next year in France and May 2024 in the UK (pending a potential change to election laws). We don’t think that is a productive use of energy, considering these contests aren’t terribly predictive. But they do point to further gridlock in the run-up to these national elections, extending political tailwinds for stocks.

In hindsight, pundits can always find a by-election or local election that predicted a change of leadership at the next national contest. But if you look at the full range, they just aren’t that telling. In most UK by-elections over the past decade, contested seats didn’t change hands. When they did, only a smattering predicted the next national vote. In one example, two Tory Members of Parliament (MPs) changed their allegiance to the United Kingdom Independence Party and won their seats anew in late-2014—just over a year and a half before the Brexit vote. But Tory seats flipping to the Liberal Democrats in 2016 and 2019 didn’t lead to Lib Dem national wins in 2017 or 2019, respectively. Similarly, in France, 2015’s regional elections correctly presaged a shift away from the Socialist Party under then-President François Hollande, but they showed momentum shifting to the Republicans. Yet their general election campaign floundered, and Macron, whose movement didn’t even exist during those regional elections, won the presidency in 2017.

We won’t hazard a guess as to whether this year’s regional elections will be more predictive. For one, as most coverage pointed out, LREM is a young party that lacks the grass roots expertise necessary to flourish in local votes. Two, a lot can change in a year. That is true partly because three, regional elections often end up being protest votes with low turnout, lending themselves to more extreme results. Sunday’s turnout was just 33%.^[i] Compare that to France’s 2017 presidential vote, when over two-thirds of voters hit the polls.^[ii] So all this shows, in our view, is that a small number of voters felt strongly enough about a change in direction to take the time to vote. That might serve as a wakeup call to Macron’s administration, prompting them to course correct in an attempt to woo voters over the next year.

The same is likely true of Britain’s by-election in the constituency of Chesham and Amersham, a leafy hamlet northwest of London. The Conservatives have held the seat since the mid-1970s. In 2019’s election, long-serving MP Cheryl Gillan won 55.4% of the vote—a majority of over 16,000. In the by-election, triggered by her recent passing, the Tory candidate lost by over 8,000 votes, with his 36% share far behind Liberal Democrat Sarah Green’s 57%.^[iii] In post-game coverage, pundits easily identified the reason why: Voters in less-urban areas disliked Johnson’s plan to build more homes up and down Great Britain, effectively removing local control over development. Now, we aren’t for or against any particular policy, but the protest alarm bells seem to be ringing loud and clear in government corridors, and there is now speculation that they will have to mount a massive climb down in order to avoid alienating more of the Tories’ core constituencies at the next general contest. Observers speculate that could arrive in 2023, presuming the legislation to repeal 2011’s Fixed-Term Parliaments Act sails through as expected, returning voluntary snap elections to the UK’s political landscape.

At a high level, the potential upshot of this by-election is that a government with an 85-seat working majority could very well U-turn on a key policy proposal. This is how you get gridlock even when one party has sweeping control on paper. Politicians’ main goal is always to win the next election, in our view. Rocking the boat with major legislation often works against that. It wouldn’t shock us if housing were only the first national policy the Tories retreated from.

We have already seen this play out in France, where Macron admitted recently that all plans for pension reform are dead, pending his potential re-election next year, due to voters’ repeated opposition. This weekend’s results could very well put the final nail in the coffin of non-COVID-related legislation as Macron and LREM switch to campaign mode.

Again, we don’t think it is possible to predict how these national votes will go. Polls this far out aren’t predictive, and a lot can change between now and the next scheduled election. But we do think the incentives for politicians to let gridlock strengthen its hold just got a lot stronger. Whether you think this is good or bad at a societal level in either country, stocks are generally happy when governments can’t do much. Even well-intended legislation can create winners and losers, and the potential losers tend to feel that pain more intensely than winners enjoy their gains. That sentiment, plus the general risk of unintended consequences, can make markets nervous when governments are more active. Gridlock, by contrast, reduces legislative uncertainty, which clears some headwinds from stock markets. So if the latest political developments bring more gridlock in the UK and France, stocks will probably be just fine with it, in our view.