Next Year in Global Politics

Editors’ note: MarketMinder is politically agnostic, favoring no party or politician in any country. We assess political developments solely for their potential market impact.

After a hectic and harried 2020 on the political front—keyed by America’s election and Brexit—2021 seems set for a refreshing calm. Brexit’s likely conclusion at yearend, American gridlock and a sparse calendar on the electoral front beyond our borders should mean markets get some relief from 2020’s tension, without big hurdles from politics next year. Here is a look at what to expect politically in the developed world and why it shouldn’t raise much risk for stocks, in our view.

New Year, new Senate. Georgians will vote in two Senate runoffs on January 5, and whatever the outcome, gridlock likely results. With Republicans’ current 50 – 48 edge, their winning just 1 seat means normal partisan gridlock prevails. If Democrats take both, Vice President-elect Kamala Harris would break ties. That gives them control on paper, but intraparty gridlock would then erupt, in our view, echoing President Donald Trump’s first two years. For example, when the Tax Cut and Jobs Act passed in December 2017, Republicans had a 52 – 48 Senate majority and a 239 – 193 House advantage. Narrow margins plus infighting watered down the final bill from initial proposals.

We think President-elect Joe Biden—with smaller Senate and House majorities—would have a tougher time passing anything even slightly controversial through 2022. The Democrats’ House edge will be either 9 or 11 seats (1 race is pending). Regardless, the party is set for its smallest majority since 1900. Hence, Democrats’ moderate and progressive wings would need near-unanimity to push anything remotely resembling his campaign pledges through, which seems highly unlikely based on swing-state legislators’ incentives.

Next up: March 17’s Dutch general election. After the Netherlands’ last election in March 2017, it took 225 days to form a 4-party ruling coalition that excluded Geert Wilders’ far-right populist Freedom Party (PVV), which won the second-most votes. Now, the PVV is again polling second, which may rekindle populist-takeover fears, particularly with the outgoing coalition having diminished to a minority government. Cobbling a coalition after this contest may require new partners.

If populist chatter escalates, it wouldn’t surprise us if uncertainty rose ahead of the vote, perhaps sparking some volatility. That happened four years ago. But as the reality of gridlock set in, Dutch stocks moved on quickly. That doesn’t predict what will happen this time, of course, but we think it is a useful guide. With or without the PVV in the next government, some form of gridlock appears most likely. Multiparty coalitions rarely accomplish much even when they seem ideologically aligned.

May 6’s Scottish Parliament election will likely garner many eyeballs outside Edinburgh. While Brexit will likely be finished, barring some highly unlikely extension, many fret another Scottish independence referendum if the Scottish National Party (SNP) regains its majority at Holyrood. This seems possible. The Scottish Conservatives—a pro-union party—more than doubled its seats in 2016’s Scottish election under party leader Ruth Davidson’s direction, taking away the SNP’s majority. But in what many see as a harbinger for next year, Davidson stood down before 2019’s UK general election, and the Scottish Conservatives lost over half their Westminster seats to the SNP. Many observers believe UK Prime Minister Boris Johnson’s relative unpopularity in Scotland will further hamstring Conservative candidates.

If the SNP prevails, this would probably heighten independence referendum chatter and could jack up uncertainty. But it would also be a long row to hoe, requiring UK government approval and, barring that, court challenges. While it is premature to speculate about the impact for stocks, the process would likely play out over several years, as the last referendum did, and such long-running political issues usually fade into the backdrop.

Rounding out Europe, Germany’s federal election is scheduled for September 26. However, somewhat unusually, we don’t know who the main candidates for chancellor are yet. In February, Annegret Kramp-Karrenbauer—leader of the ruling Christian Democratic Union (CDU) and Chancellor Angela Merkel’s chosen successor—announced she was stepping down, and the CDU hasn’t yet elected a replacement. Meanwhile, the CDU’s junior coalition partner and primary opposition, the Social Democratic Party (SPD), is also in disarray. Vice Chancellor Olaf Scholz is the SPD’s candidate, but not his party’s leader. He comes from its moderate wing, whereas its current leadership is progressive, underscoring internal divisions that have fractured the SPD ever since it suffered historic losses in 2017’s election.

Whatever the outcome, it is hard to see any resulting government achieving a lot. No one with Merkel’s popularity is waiting in the wings. Scholz, also Minister of Finance, earned some affection by opening Germany’s coffers during COVID—but cheer over a finance minister who loosened the purse strings during a crisis isn’t quite a parallel for the enthusiasm that made Merkel chancellor for four straight terms. Together, the CDU-SPD coalition hasn’t done much besides. Past CDU coalitions with more like-minded parties accomplished little, too. So while we could get some uncertainty in the run-up to the vote—a normal occurrence in recent major European elections—it is hard to see big policy shifts emerging afterward, which stocks shouldn’t mind.

A Japanese general election is due by October 22, but a snap election could occur earlier. Since Prime Minister Yoshihide Suga took the reins when Shinzō Abe stepped down for health reasons in September, pundits have speculated he would call a snap election to get a firm mandate. Rumor has it he is eyeing a contest after the Tokyo Olympics so that he can focus his immediate attention on tackling COVID rather than re-election. But one complicating variable is his Liberal Democratic Party’s (LDP) leadership election next September, which incentivizes an earlier contest.

Election timing aside, the LDP is the overwhelming favorite to win any vote given the opposition’s long-running disarray—the status quo doesn’t seem much in jeopardy. That would probably mean long-hoped-for structural reforms remain a pipe dream, but we think markets came to terms with that ages ago. Export-focused Japanese multinationals probably do better than companies reliant on domestic fundamentals, but that is an easy enough divergence for global investors to navigate, in our view.

Speaking of snap elections, Israel appears on the verge of one. After several unclear elections in recent years, “Alternate” Prime Minister Benny Gantz and long-serving Prime Minister Benjamin Netanyahu devised a compromise power-sharing deal in May involving them taking turns as prime minister. Their rivalry, always fractious, has only gotten more so under COVID lockdowns—and Netanyahu faces a corruption trial. So it was no surprise last Wednesday when Gantz backed a bill to dissolve the Knesset—and hold another election, which would be Israel’s fourth in two years. The dissolution bill requires further votes to pass, but regardless, political uncertainty is nothing new to Israel’s tiny stock market.

All in all, in our view, there doesn’t seem like much political uncertainty in 2021 for global stocks to deal with. Of course, snap elections are always possible, but based on what is knowable now, a benign political backdrop in general should be positive for markets entering the new year.