The U.S. presidential race is sure to roil the markets in 2012, but advisors also need to keep an eye on political elections around the globe next year, according to Rebecca Patterson, J.P. Morgan Asset Management’s chief markets strategist.
“If you ever wanted a time to look at politics, now is it, and 2012 could be even more politically driven,” Patterson told institutional investors during a Thursday webcast where she considered how key electoral races in the year ahead could shape financial markets.
Investors in recent months have seen politics, especially in the U.S. and Europe, increasingly dominate financial markets. Looking ahead to 2012, Patterson said, this trend will not only continue, but even accelerate. While elections are always part of the macro landscape, so many key races coming at a time of global economic fragility makes understanding the different races—and how they might affect portfolios—critical.
Clearly, Patterson (left) said, global politics matters to the markets. For example, she pointed to Prime Minister George Papandreou’s stunning decision Monday to call a public referendum on Greece’s bailout. By Tuesday, Patterson noted, the VIX Volatility Index had skyrocketed 20%, reflecting market uncertainty over Greece’s impact on the euro zone and the banking system. (On Thursday, he backed off the call for a vote.)
Here are the top elections for advisors to consider in 2012, including Patterson’s views on how politics create market-sensitive risks:
1) United States: The U.S. presidential election season in 2012 is bound to be “extremely polarized,” according to Patterson. “The unwillingness to cross the line to compromise is at its highest point in a century,” she said. While J.P. Morgan doesn’t advocate any candidates, the latest research shows either Mitt Romney or Herman Cain as the Republican contender against President Barack Obama. Jobs will be the top issue going into the elections, with Obama pushing to minimize the amount of fiscal tightening in 2012.
A Republican victory would make tax cuts more likely in 2013, and cuts to Social Security and Medicare would rise on the agenda. “Equity markets have historically seen better than average performance in the fourth year of a presidential cycle, but this cycle has been different,” Patterson noted. “Uncertainty over competing deficit reduction proposals and the risk of recession are likely to make 2012 another challenging year.”
2 and 3) France and Finland: A sustained rally in European assets is unlikely in 2012, given downside risks to growth, “austerity fatigue” and a possible rise in right-wing political parties that oppose the European Monetary Union. A victory for the opposition Socialist party in France’s presidential elections in April and May could undermine growth via higher taxes and government spending. Further, Finland’s presidential elections in January and February could give rise to more anti-euro sentiment from the Euro-skeptic True Finns party.
Even before those two countries’ 2012 races, Spain’s presidential race this month will test the Monetary Union's strength considering the risk of social unrest there due to high unemployment and reforms aimed at unions and public employees.
4) Egypt: With the Arab Spring influencing elections throughout the Middle East in 2012, Egypt’s upper and lower house elections in the next five months are especially apt to affect geopolitical sentiment in the region—and indirectly, oil prices. In general, oil-producing nations such as Libya, Russia and Venezuela all need revenues for budgets that support social stability.
So despite moderating global demand for oil, Patterson sees oil prices rising in the year ahead. Regional instability “will likely cause investors to push prices higher as they position for potential supply shocks,” she said.
5) China: Next October, China will undergo a leadership transition that is unlikely to shake up the country’s economic and trading policies in the short term. However, as China’s leadership ages—seven out of nine current nine Politburo leaders will probably retire—the risk is that the younger generation may become more “inward looking” and take a stance less friendly to the global markets, Patterson said. But for now, China’s new leadership will likely favor stability, she said.
The main risks to China will come from external sources, such as a potentially less friendly government in Taiwan and possible military provocation by North Korea.
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