Stock markets fall from Paris to Mumbai under stress of election results |  Business

Stock markets fall from Paris to Mumbai under stress of election results | Business

Elections have consequences for financial markets. But what that means for investors is often hard to predict.

Just look at France, where the threat of electoral losses for the president’s centrist party recently sent the French stock market into its worst week in two years. Or India, where questions about the margin of victory for Prime Minister Narendra Modi’s party sent Indian shares from a 3.4 percent gain to a 5.7 percent decline and back to a 3.2 percent gain in – an interval of three days. month.

“Choices have consequences,” wrote strategists at Morgan Stanley in a recent report. “But when it comes to identifying these consequences for financial markets, it’s easy to mistake the noise for the signal.”

Around the world, from Mexico to South Africa, surprising election results have rocked markets recently. And more is likely to come, with more than half the world’s population heading to the polls throughout 2024, according to the BlackRock Investment Institute.

The July election in the United Kingdom is fast approaching. Later this year, the November presidential election in the United States will trigger its own volatility in the markets. It all adds up to a lot of uncertainty for financial markets that notoriously hate it.

The biggest aftershocks rattled the countries’ stock markets, but it’s in the traditionally sleepier bond market where the bigger threat may lie. That’s because many of this year’s surprise victories lead to speculation that the victors could push for more spending by governments without raising more revenue to pay for it.

Looser fiscal policies could make it harder for governments to repay their debts. Bewildered investors are already punishing them by demanding higher interest rates before lending to them.

“The bond market’s tolerance for fiscal disorder is very low these days,” said Niladri ‘Neel’ Mukherjee, chief investment officer at TIAA Wealth Management.

In the upcoming US election, the bond market could remain calm in a scenario where neither party sweeps the White House and both houses of Congress, Mukherjee said. But if one side wins control, making it easier to dictate fiscal policy, it could mean sharp jumps in U.S. Treasury yields in the bond market. This, in turn, would make mortgages more expensive, increase the possibility of a recession, and affect stock prices.

“It’s exactly what I have in mind,” Mukherjee said. “Not too many people are talking about the bond market and how it would react.”

Consider France. Bond investors this week demanded 0.75 percentage points of extra yield to lend money to the French government over 10 years, compared to a similar loan to the German government, which is seen as a safer bet. A week earlier, before the surprise victories of far-right parties in the European Parliament elections, investors were asking for just 0.48 percentage points of additional yield.

That might not sound like much, but it’s a big deal in a bond market where investors are getting just 2.36% yield for lending money to the German government over 10 years.

A challenge for investors is the difficulty of profiting or protecting against election results. That’s because financial markets are constantly changing depending on who’s running the poll. To anticipate them, an investor would need sufficient clairvoyance to know what is the surprising result that the market does not anticipate.

A Republican victory in November, for example, could make higher tariffs and broader restrictions on trade more likely, which could boost the fortunes of American manufacturers. But their stock prices would already be rising before November, whenever traders see Republicans gaining in the polls. And even if an investor correctly guesses a Republican victory, in a scenario where the rest of the market leans otherwise, that investor would also need to know when those trade policies will take effect in order to reap the maximum profit. There are a lot of things to do right.

Instead of trying to figure out what investments will do right after the election, many professional investors plan what investments will do years from now.

In India, for example, Prime Minister Modi’s failure to win a clear majority could slow some of his economic reforms. But the world’s largest country still benefits from a young population, according to strategists at the BlackRock Investment Institute. It also continues to benefit from companies’ long-term effort to reconnect their global supply chains after the pandemic showed the risks of over-reliance on China.

Additionally, the US stock market has historically tended to rise regardless of which party controls the White House.