Elections to shape markets in 2014

Politics moves markets. If nothing else the global financial crisis (GFC) made clear that when push comes to shove government is expected to step in. Ever since, markets have ebbed and flowed in response to government proposals to reshape the global financial order.

But as we get further from the core of the crisis there are hopes that the world might be slowly returning to some semblance of normalcy in which markets are moved by ‘fundamentals’ instead of politics. Don’t bet on it. In 2014 some of the world’s most important economies will hold elections with the outcomes set to shape markets for years to come.

The most significant contest will take place in the United States where Congressional mid-term elections will throw open all of the seats in the House of Representatives and one-third of the Senate. These elections signal the beginning of the end for the Obama presidency and the commencement of the 2016 presidential campaign. Republicans and Democrats will both be looking to sharpen their message in the lead up to the November poll and establish the strongest possible launching pad for the primaries and presidential campaign soon to be upon us.

While the budget deal reached in late 2013 has removed a major point of conflict there will be a raft of other issues from which there can be no escaping the white heat of political combat. Much of that will be between Republicans with moderates facing significant challenge from Tea Party groups looking to punish anyone who supported a budget deal with Democrats.

The extent of Tea Party anger and the efficacy of their campaign will determine whether they are able to dramatically reshape the make up of the Republican Congressional Caucus. But gerrymandering, which has made most Congressional districts extremely safe, has made their task much easier by elevating the importance of primary contests where the highly motivated and organised hold undue weight. As a result Republican members of Congress will spend the year moving to the right in order to fend off Tea Party challenges and save their nominations.

That sets the Congress up for two years of even more partisan bickering and raises the spectre of another government shutdown when the 2013 deal comes to an end. It also exposes firms to a period of regulatory review that may end with a reduction in red tape but will be preceded by months, if not years, of uncertainty.

But America is not the only country holding elections in 2014 with ramifications for markets. Across Europe voters will go to the polls in May to elect a new European Parliament. It will be the first test of a grand coalition of right wing parties across the continent seeking to garner enough support to become an effective voting block in Brussels and turn back the European project. If this ‘pact of the right’ succeeds efforts to bring about greater political and economic integration are likely to stall creating real uncertainty for investors about the future political and financial structure of Europe.

The world’s most populous nation will also go to the polls with Indians seemingly preparing to replace the decrepit Congress Party with the nationalist Bharatiya Janata Party (BJP). The BJP offers hope of sweeping new reforms to the Indian economy that will further open it to the world and unleash its currently unrealised potential. But its populous streak also increases the likelihood of upsetting foreign investors whose funds are critical to ramping up investment in India’s crumbling infrastructure and supporting its current account.

Closer to home Indonesia will also hold parliamentary and presidential elections that will determine the basis of its relationship with Australia over the next five years. As it continues its economic rise Indonesia will increase in importance to Australia. In turn Australians will have to dramatically re-think our perception of, and relationship with, our closest neighbour as it grows over the next 20 years to become the world’s seventh largest economy with a middle class exceeding 130 million people. Recent events threaten to bring about a new Indonesian political elite wary of close ties with Australia and focused on the economic opportunities to the north.

Elsewhere, politics will continue to shape markets despite the absence of elections. In particular, the shifting balance of power in oil markets will unsettle established relationships in the Middle East and put the region on the path to conflict as America’s attention drifts toward Asia.  The prospect of Iranian oil returning to world markets threatens the income upon which Middle East regimes have become so dependent to calm their restive youth.  Energy supply lines lay in an increasingly volatile region.

In 2014 predictions of the demise of politics as an influence on global markets will prove short lived. The capacity of America to address its long term fiscal challenges, of Europe to push further down the path of integration and reform, of India to realise its economic potential and of Australia to take advantage of the market directly to our north will all be influenced by the whims of voters. Rather than receding in 2014 politics will continue to move markets.