The year of elections: what it means for pensions and investments

Louise Doherty: Hello and welcome to the latest episode of Thinking Forward with myself, Louise Doherty and Mike Ambery, where we explore the trends and developments affecting the UK pension industry. So to help with the episode, Mike and I are lucky enough to be joined by Anthony O’Brien. Anthony is our Head of Market Strategy at Phoenix Asset Management. So Anthony, thank you for joining us.

Anthony O’Brien: Thank you very much for the invitation to come.    

Louise Doherty: In this episode, we’re going to look at international economics and political trends.  As many of you will know, 2024 has been dubbed the year of the global elections.  More voters than ever are going to be heading to the polls. Even the number actually isn't agreed. I thought I'd read 70. Mike, what did you have 64?  

Michael Ambery: We were going for 64. But, you know, I'm geometric, so, it could be any number. I think it’s half the world's population just abouts? And 60% of the economic output for the world.   

Louise Doherty: I'm going to put you on the spot Anthony. What does this actually mean for us? Does it mean anything? I'm not sure.     

Anthony O’Brien: Well, the economic influence of elections tends to be overstated. They've only really had a significant effect if the government is promising structural change, is, promising to interfere with monetary policy or to change the geopolitical stance, and then you have to even have the institutional framework or landscape to be able to provide those changes. So, you know every election might seem super important, but the economic effect, as I say, is, you know, can be rather more, you know, sort of dubbed down.      

Louise Doherty: What about, I suppose, then for investments, is it good, bad?  Does it have an impact?    

Anthony O’Brien: Again it's uncertain. You know, and this year has provided many examples of that. The amounts of times that I read from financial analysts about two months going into a US election, you know, markets do so and so, two months coming out of the US election, markets do something else.  

But each election is different. You know, is the incumbent involved is standing for re-election. Is the economy in a recession and therefore you’re reducing the sample size of any of those, events to something which is quite insignificant. So I don't think you can actually read a general term into it. Again, if you look at asset price performance in the outcome of the UK election, which you had a huge Labour majority that would have been entirely different had we had, you know, the same outcome in the 2019 election when Jeremy Corbyn would have won.  

And then we look at, you know, France. And that was genuine uncertainty, where President Macron called a snap assembly election, and markets were thrown into turmoil with that decision. So I think what markets don't like is uncertainty. So in a race which is 50/50, where the outcome is binary between if one side or the other, wins. And then, you know, markets generally do not like that and react with quiet, significant volatility. And that leads us to the US election, I suspect.     

Michael Ambery: And on to the US election. Louise, what happens on November the 5th?     

Louise Doherty: What does happen on November the 5th? Do you want me to get my crystal ball out?   

Michael Ambery: I do, tell me what happens. You know I love fireworks. But it is probably the biggest political event, globally. At least for this year. And if you're not Australian because it's next year, in any case, over there, I guess, in in the style of Donald Trump or Kamala Harris, if you can, Anthony or alternatively, in your own style. What do you think this will mean economically? In terms of who wins in the US.

Anthony O’Brien: Which is a very good question. I think there are a couple of things which is certain. You know, the first one is there is, you know, consensus support for being tough on China. So we would expect to see higher tariffs and, you know, more policies aimed at Chinese goods entering the US. I think the other is that there is just no appetite for, you know, for fiscal constraint. The US debt GDP is at 100%. The deficits are meant to be around 6%. You know, as far as the eye can see. So there seems to be no willingness on either side to actually try to get the deficit under control.  

So if we look at the two candidates, you got Kamala Harris, who even though she's been in the public eye for many, many years, we really don't know what she stands for. You know, she's been so much a supporter of President Biden’s, election stance. That it’s very tough to see, you know what she really is, you know what she really sort of stands for economically. I think what you do know is she’s been a firm supporter for the IRA. So the Inflation Reduction Act, which is, you know, very positive for the green transition. But that's probably all we can, you know, sort of eke out at the moment. More will come.

You know, as for Trump, the unfortunate thing with President Trump, as we found in his first term, is what he says whilst campaigning can be entirely different to what he does. But when he's in office. 

But where markets are focusing, there are two things. One is certainly the tariffs. And he has promised to hit China with 60% tariffs and 10% tariffs to all other countries, which could have a significant effect both on inflation and growth. And, you know, it will affect the US inflation, by about 1%, we think. And, you know, slow the US growth down by a half percent. So it's not you know they win from the tariff situation.  

The other thing is the some of the tax cuts which he put in place back in 2016 are set to unwind in 2026. So this was the Tax Cuts and Employment Act, I think. He has promised to roll them forward. And that could have a significant effect on the US debts GDP. So, you know, the figures I've seen is increasing that to around from 100 to 130 by the end of the decade to 130%, and also increase the deficits to around 9%, which is a significant change. And the US dollar has enjoyed the privilege of being the global reserve currency. 

And, you know, but running fiscal deficits for so long and so high could easily, easily challenge that. I don't know what that level is. And I don't know, you know, until we get there. But what we saw, you know, with the, the Truss mini budget was, you know, there is quite a fine line between markets being sanguine about things and genuine fear. And when you cross that line, you know, that's when markets just get descend into turmoil. And I think, you know this is a possible problem going forward.

Michael Ambery: Anthony, in a lot of the elections globally, we've seen cost of living be the key issue. For example, across the globe we've seen cost of living concerns. In terms of the Indian result for Prime Minister Modi, not necessarily getting the result as expected in India, equally in South Africa. We’re seeing uprising somewhat, riots, maybe even to cost of living. Would you say cost of living is more of a key factor than stewardship? And, the race to sort of net zero.      

Anthony O’Brien: Absolutely. I mean, certainly the cost of living seems to have been an essential theme for many elections. And, you know, people feel poorer and have certainly, you know, taken that out on the government and affecting majorities or indeed, you know, a change of government. And whilst the cost of living has been the central theme, that's meant a couple of things have happened as a result, as you say, you know, the climate change or the transition towards, you know, further climate change has seemed to have taken a backseat, even as temperatures are breaking record highs. 

And we've seen, for example, in the European Union elections, you know, the Greens, shared most of the gains which they had made in the years earlier. But it's also meant that any government campaigning for fiscal restraint or austerity, has just made no inroads into the electorate. It's all the parties who are promising tax cuts, and spending have done well, even though fiscal deficits are reaching record highs.  

Michael Ambery: Brilliant. Thank you. In terms of economic concerns, we had a phrase back in the day on the Bill Clinton, which is, it’s the economy stupid. I guess what’s the sort of factor, over economic facts versus economic expectation, if you will. Particularly as, new governments come to power. What's the future of sort of political mood versus individual feel in terms of re-election and are there any cost cuts, measures, economic drives that you think may occur to, plan for the future for new governments?        

Anthony O’Brien: It's a really good question because, I mean, there is a definite disconnect, particularly in the US, between the strength of the economy and the Democrats approval rating. The economy has grown, you know, high 2% for the past couple of years. Unemployment rate is down low 4% for the past couple of years, you know, which is almost unprecedented in the US.  

You know, and inflation has come back from something which was worryingly high down towards around 3%. But at the same time, you know, people are very unhappy with the government and, you know, there is this definite disconnect between perception and perhaps reality. You know, people have a very, or more of a positive view on their own, you know, economic backdrop than they do perhaps of the economy. Or perhaps they're saying, well, I'm doing okay, but that's because, you know, myself rather than down to the government and therefore looking to punish the government that way. 

You know, social media has probably got a role in this. But, you know, there generally is a, you know, a move for people to follow a party which they feel is more, aligned with their culture, with their class, with, you know, a certain amount of tribalism rather than the amount of cash they have in their pockets. However, we've seen this in the US, but in Europe there is tends to be, you know, sort of greater evidence that it is the economic backdrop which tends to have more of an influence on election results. 

We saw it in the UK where two years of flatlining the economy, you know, certainly punished the conservative government. You know, people are very, the French are very upset with, you know, their lack of economic performance over the past couple of years. And, you know, Macron certainly, you know, saw the brunt there.  

And the popularity of the German government is certainly being hit by you know, it's well, the recession that they've been in. So I think, you know, it's not entirely disconnected, but there certainly are, you know, sort of other reasons for you know, people to change their vote. You know, I personally hope that, you know, governments will still concentrate on public services, will still concentrate on economic growth. And then it's just up to the voters who they choose.        

Michael Ambery: Thank you. I know you don't give advice, Anthony, so I'm not going to ask for any advice. But Lou, you know, I'm a little bit nervous of asking when should I buy my foreign currency and sort of market volatility at the moment. I guess is there a harbinger of recession coming or what do you sort of read on the situation for, current cliff edges of market volatility and whether you think that will continue as we head towards the US election or, other events geopolitically?       

Anthony O’Brien: Sure. I mean, certainly the latest Labour market report which we got from the US was worrying, the unemployment rate rose from, 4.1 to 4.3%, which in the past has been a bit of a, harbinger of a recession to come. I think there are reasons perhaps that was a bit overstated. You know, we’re not seeing the layoffs that we've seen in the past, which would suggest the recession is on the way. And also the economy, as I've said, is growing pretty strongly high 2%.  

And that's expected to be the case for the rest of this year. But there are, you know, a couple of reasons for caution and certainly some of the survey data which we found in the US is softer than, you know, than we would have hoped.  So we might see a couple of quarters in 2025 as negative, mildly negative, but nothing like the nasty recessions that we've seen in the past. Now, the other side of it is, you know, fortunately, we've been placed in this with inflationary pressures, reducing the Federal Reserve or, you know, monetary policy makers in general have a lot more policy space for them to reduce rates if the economies do slow down. And that wasn't the case this time last year when inflationary pressures were still pushing up. 

They were surprising to the upside. And a lot of the central banks could only raise interest rates. So I do think that even if we do get this softer period of growth that we're expecting, that if anything looks a bit too adverse, then policymakers really do, you know, can come in and they can cut rates rapidly and substantially, which, you know, should help sort of balance out the, you know, the economic cycle as we see it. So as far as your, portfolio is concerned, you know, one of the problems which, you know, we've had over the past couple of years with inflation being so high, is that markets, both bond markets and equity markets, have both tended to either sell off at the same time or have rallied at the same time. So this correlation between the two of them was very much seen to be one.  

And what I think we're moving to now is we're moving away from an inflation problem into a growth problem. And where central policy, central banks can actually move rates up and down well, move rates down if they need to. Then that coloration, sorry correlation between equity markets and bond markets can actually reverse.  

And I think that means that, you know, for any portfolio, you really should be looking to hold a, you know, a decent balance between equities and government bonds, you know, placing your bets 50/50 on, you know, how you think the economy's going to go next year, because if the economy does okay, then bonds perhaps won’t, you know, perform so well. But if the economy does badly then yeah, that’s when you're looking for some of the, you know, the sort of the boost from your bond portfolio to help balance perhaps potential losses in equities.        

Michael Ambery: Brilliant, thank you, Anthony.      

Louise Doherty: No advice but I'll be reviewing my portfolio. That’s all I’m going to say.    

Thank you so much for joining us today Anthony. And as I said, I hope you'll come back regularly. Let us know what you’d like to hear from Anthony going forward. I’ll put my apologies in now, I’m on holiday for the next episode, so Mike is going to be in charge, and I believe you've got three guests joining us? 

Michael Ambery: Yeah, well, whilst the cat's away, I'll let the person who lets the cat's out of the bag join me. So Femi Adigun is going to join me from Standard Life who I'm looking forward to and also John Greenwood and Paul Leandro from Corporate Advisor and Barnett Waddingham, respectively. We're going to run two horses to make you jealous. We're going to talk about Australia and how that runs parallel to pension reform. So we’ll miss you. Come back and, thank you.  

Louise Doherty: I'll look forward to listening to it when I get back. Thanks for joining us today on this episode of Thinking Forward. You can catch up on previous episodes on our website. Just search Standard Life Thinking forward. Thank you.