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.”