Elections Are Reshaping the Global Landscape

Transcription

1 Craig P. Holke Investment Strategy Analyst WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS Elections Are Reshaping the Global Landscape November 20, 2018 Key takeaways» Elections around the world have led to significant political changes. These changes are reshaping economies and existing relationships.» Populist forces have capitalized on voter unease. The direction in which the newly elected leaders take their countries remains to be seen. What it may mean for investors» Political uncertainty often leads to increased market volatility, which usually subsides once policy direction and timing begin to take shape. There has been significant upheaval in recent elections around the globe. From the surge of populism and nationalism in some countries to changing global trade dynamics, these elections are reshaping today s global economy. Table 1 provides a summary of these 2018 elections and the impacts they have had. The Chinese communist party election in March was about consolidating power for President Xi Jinping. He received 99.8% of the votes available to remove the two fiveyear term limit originally put in place by Deng Xiaoping. This change will allow President Xi to serve as long as he desires and continue with his vision for shaping China into an even more powerful global leader. The Italian elections in May have raised issues beyond Brexit within the EU. The new, populist parties in power are bringing the economic divide between northern and southern Europe front and center. Italy s tax and spending plans are not in line with the desires of the European Commission, raising concerns about the country s financial stability. This is also increasing uncertainty in the EU and making the euro potentially weaker than it should be. Next, we saw a pair of elections in North and South America. While the political leanings of the two presidential winners in Mexico and Brazil are on opposite ends of the spectrum, the causes are similar. Both leaders were elected as populist outsiders to address crime and corruption. Market reactions have been opposite. There exists uncertainty over whether President-elect Lopez Obrador of Mexico will enact leftist, market-unfriendly policies. Recently, the peso responded negatively when the new airport project in Mexico City was cancelled. In contrast, markets have responded more favorably to President-elect Bolsonaro of Brazil. He has spoken of enacting a traditionally liberal, free-market economic policy. Markets also appear to be reacting favorably to changes from the corruption-laden prior administrations Wells Fargo Investment Institute. All rights reserved. Page 1 of 5

2 This leaves us with the recent U.S. midterm elections earlier this month. Following the surprise election of President Trump in 2016, the midterm elections actually went according to expectations. The president remains in power, but Republican control of the Senate likely will be tempered by the Democratic-led House of Representatives. Market reaction was initially positive following the election, but it has turned negative as the focus has returned to questions about global growth, along with trade concerns. Table 1. Key 2018 global elections results and impacts Date (2018) Election Results and impact March China Election granted Xi Jinping the ability to be president for life. This allows more time to achieve Xi s long-term plans for transforming China s economy. May Italy The election resulted in populist parties the Five Star Movement and League defeating the former center-left Democratic Party. While declaring no desire to leave the eurozone, Italy is clashing with the European Commission over tax cuts and spending increases in its proposed budget. This has resulted in higher Italian bond yields and downward pressure on the euro. July Mexico Andres Manuel Lopez Obrador won the Mexican election with plans to grow the economy while addressing corruption and violence. Uncertainty over the implementation of leftist economic policies raises concerns over further foreign investment. A weakening peso and rising inflation are issues. October Brazil Far-right populist candidate, Jair Bolsonaro, won the election for president of Brazil. He campaigned on a platform of addressing violent crime and corruption, each of which have plagued Brazil for years. The Brazilian real and equity markets generally have responded positively to the change in leadership. November U.S. Democrats took control of the House of Representatives, while Republicans maintained control of the Senate. Markets had a favorable initial response. Focus likely will return to fundamentals of business and the economy. Source: Wells Fargo Investment Institute; November 15, Wells Fargo Investment Institute. All rights reserved. Page 2 of 5

3 What it may mean for investors Voters around the world have expressed discontent with existing governments. Many of these elections have resulted in surprises or significant changes in leadership. This has led to increased uncertainty regarding changes in policy direction. A primary result of this uncertainty is increased volatility, whether for local equity markets or for currencies. Higher volatility leads to greater investor unease. As we have seen before, once the elections have passed and policy begins to form in one direction or another, markets tend to settle down and investors return their focus to the underlying fundamentals. There always is the potential for political upheaval, especially in today s world. Next year will see elections in many other countries. Markets likely will experience increased volatility but eventually adapt and move forward under the new political leadership Wells Fargo Investment Institute. All rights reserved. Page 3 of 5

4 Economic Calendar Date Country Report Estimate Previous 11/20/2018 GE PPI YoY 3.30% 3.20% 11/20/2018 JN Convenience Store Sales YoY % 11/20/2018 AU Westpac Leading Index MoM % 11/20/2018 US Housing Starts 1218k 1201k 11/20/2018 US Building Permits 1265k 1241k 11/20/2018 US Housing Starts MoM 1.30% -5.30% 11/20/2018 US Building Permits MoM -0.40% -0.60% 11/21/2018 UK PSNB ex Banking Groups 6.2b 4.1b 11/21/2018 JN Natl CPI YoY 1.40% 1.20% 11/21/2018 US MBA Mortgage Applications /21/2018 US Initial Jobless Claims /21/2018 US Durable Goods Orders /21/2018 US Continuing Claims /21/2018 US Bloomberg Consumer Comfort /21/2018 US U. of Mich. Sentiment /21/2018 US Existing Home Sales 5.20m 5.15m 11/22/2018 EC Consumer Confidence /22/2018 JN Nikkei Japan PMI Mfg /22/2018 US Bloomberg Economic Expectations /23/2018 EC Markit Eurozone Manufacturing PMI /23/2018 US Markit US Manufacturing PMI /23/2018 US Markit US Services PMI /23/2018 US Markit US Composite PMI /26/2018 JN Leading Index CI /26/2018 US Chicago Fed Nat Activity Index /26/2018 US Dallas Fed Manf. Activity /26/2018 GE IFO Expectations /27/2018 SK Business Survey Manufacturing /27/2018 AU Construction Work Done % 11/27/2018 US FHFA House Price Index MoM % 11/27/2018 US S&P CoreLogic CS 20-City YoY NSA % 11/27/2018 US Conf. Board Consumer Confidence /27/2018 US Conf. Board Expectations /27/2018 US Conf. Board Present Situation /27/2018 IT Manufacturing Confidence Source: Bloomberg, as of November 16, Wells Fargo Investment Institute. All rights reserved. Page 4 of 5

5 Risks All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR Wells Fargo Investment Institute. All rights reserved. Page 5 of 5