Democracy, take a bow: 2024 is the year of the ballot box. At least 64 countries and the EU – or more than half of the world’s population – will have been able to vote in at least one election by the end of this year. Plebiscites to watch in the coming months include those in France (from 30 June), the UK (4 July) and the US (November). But how might all this democratic activity affect stock indices and currency markets?
Elections can be good for markets
Despite the political uncertainty that elections bring, stock markets in countries going to the polls this year are performing well:
• The three major US indices have all posted year-to-date gains: the Nasdaq 100 is up more than 17% so far this year, while the S&P 500 is up around 14%. The Dow Jones, which does not include Nvidia among its constituents, is up just over 2.5%.
• The benchmark stock index in India, where a general election took place in June, has also performed well this year: the Nifty 50 is up more than 7% year-to-date having already rebounded from a dip after the party of prime minster Narendra Modi failed to secure an outright majority.
• In Taiwan, where elections took place in January, the Taiwan Capitalisation Weighted Stock Index is up about 25% since the start of 2024.
• Ahead of elections in France and Britain, the CAC 40 and the FTSE 100 have made year-to-date gains of 3% and 5.7%, respectively.
Note: Data correct at the time of writing.
Early elections in the UK and France
This bumper election year has witnessed two particularly unexpected moves. Although many pundits expected a UK general election to take place in the autumn, on 22 May prime minister Rishi Sunak surprised everyone by calling an election for 4 July, despite his Conservative party lagging behind the opposition Labour party by about 21 percentage points, according to the BBC poll tracker.
Then, perhaps even more surprisingly, on 9 June French president Emmanuel Macron called snap parliamentary elections following a big win for his rival Marine Le Pen's National Rally in the European Parliament vote. The first round of voting in France is set for 30 June, with a run-off on 7 July.
From an economic perspective, both France and the UK – and arguably most of Europe – have one important thing in common at the moment: a lack of growth. Economic stagnation and the cost of living crisis have given rise to discontent among the electorate. There are other similarities, too. In both France and the UK the welfare state is proving difficult to sustain with an ageing population and high levels of debt. The tax burden is increasing. The economies of France and Britain are losing their competitive edge. These deep-lying issues are difficult to solve, and could become a catalyst for political instability.
Politicians have little room for manoeuvre as markets fear uncertainty
Despite the challenges facing the world’s developed economies, governments have little room for manoeuvre, irrespective of their political ideology. Just ask Liz Truss. Her brief stint as UK prime minister in 2022 crashed the pound and triggered a sharp rise in the cost of long-term government borrowing after she and her chancellor Kwasi Kwarteng unveiled a mini-budget that included £45bn of unfunded tax cuts.
It was the uncertainty around those cuts that unleashed chaos. Markets fear uncertainty. Uncertainty makes investors hesitate and causes spikes in volatility. Indeed, the announcement of early elections in France and the UK has not helped the two countries’ benchmark stock indices. Just in the past five days, the CAC 40 has fallen 4.2% while the FTSE 100 has declined 1.6%.
UK 100: Daily chart, 12 June 2024
Uncertain futures, uneven outcomes
Political uncertainty in France and the UK is weighing more heavily on the euro than on the pound. The euro has continued to lose ground against the pound, with EUR/GBP breaking below a support level at £0.8493. The next significant support zone sits in the area from £0.8282 to £0.8202.
EUR/GBP: Weekly chart, 12 June 2024
The pound may be faring slightly better than the euro because there is less political uncertainty in the UK, where – according to the polls – Labour appears likely to emerge victorious on 4 July.
In contrast, Macron's decision to call early parliamentary elections in France looks like a huge gamble, the outcome of which is far from certain.
Further proof, perhaps, that markets like to know where they stand.
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