Moments of uncertainty can both pose threats and create opportunity, and elections are no exception.
Andrew Milligan, head of global strategy at asset manager Standard Life Investments, says political uncertainty occasionally drives asset prices, leading some investors to price a political risk premium into European and emerging market assets.
“Concerns about lack of reforms in France and Italy or worries about the elections in Greece in 2015… are clearly affecting investor sentiment,” he says.
Conversely, Nick Sykes, partner in the investment consultant team at Mercer, argues elections have “very little impact” on markets because the difference between alternative possible governments is often small, especially in developed European countries.
But in developing markets, Michael Gomez, head of the emerging markets portfolio management team at asset manager Pimco, views election dynamics as a “localised issue” with differing impacts across those markets.
Concerns about lack of reforms in France and Italy or worries about the elections in Greece in 2015… are clearly affecting investor sentiment
Andrew Milligan, Standard Life Investments
Brazil exemplified this dynamic during its recent close-run and polarising election in which Dilma Rousseff was re-elected president. “India looks to be in a much improved position under Modi, while the new economic team in South Africa is cementing its credibility,” Gomez adds. “Indonesia has been subject to some headline noise, but we view the Jokowi administration favourably.”
Potency of policy
Milligan says countries that push through structural reforms are usually rewarded by investors.
However, he points out that many remain worried about France and Italy, and questions still hang over Germany.
“Germany is running a sizeable current account surplus but refuses to allow a major expansion of wages, a large infrastructure programme or to run a budget deficit, hence limiting the expansion of domestic demand and relying on other eurozone countries for the heavy lifting of adjustment,” Milligan says.
The implication is a lengthy period of low growth for Europe, with periodic European Central Bank responses creating “greater volatility due to their unconventional nature”.
Funding levels
Sykes argues that ongoing volatility causes a modest deterioration in scheme funding levels, sometimes putting pressure on companies to increase contributions and trustees feeling obliged to reduce investment risk.
Although short-term market movements are in his view “clearly unfavourable” for funding positions, Sykes advises investors against taking too much notice of short-term volatility.
For Milligan, volatility creates risks and opportunities; while some schemes benefit from a sell-off or surge in asset prices, others adopt more constraint and reduce riskier assets.
“The longer-term risk is that funds are increasingly diverted into expensive assets such as benchmark government bonds, which may reduce the volatility but at the expense of longer-term returns for pensioners,” he says.
