Opinion | Global markets bracing for a 2024 full of potentially volatile elections

Opinion | Global markets bracing for a 2024 full of potentially volatile elections

Opinion | Global markets bracing for a 2024 full of potentially volatile elections

We are less than a year away from the 2024 US elections, which will be held on November 5. The next president will inherit a large fiscal deficit, as the Congressional Budget Office predicts that the fiscal deficit will remain steady at 5-7 per cent of GDP per year over the next decade, accompanied by higher borrowing costs.

Although some of the current candidates have policy track records that can help mitigate uncertainty for investors, we might not see a sustainable solution to the fiscal deficit challenge. This could potentially raise market expectations for government bond yields in the long run because of ongoing strong supply and potential inflationary effects.

During the campaign, Republican and Democratic candidates could offer different policy priorities that could effect specific sectors or industries. A Republican candidate could be more inclined to keep corporate taxes low. They might also opt to be less hands-on regarding regulation, especially on the healthcare sector, financial industry and fossil fuels.

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Meanwhile, a Democratic candidate could focus more on raising taxes for high-income earners, place greater emphasis on drug price controls and promote green energy. As a result, some investors might adjust their allocation according to these policy platforms and who is more likely to be win enough votes to be the next president.
Apart from the presidential race, the outcome of the congressional elections could also have significant policy implications. A divided Congress, where the president and one or both of the chambers come from different parties, is not uncommon and weakens the US president’s ability to pass major legislation.
The size of the majority in the House and Senate is also important. As we have seen in the past year, a narrow majority means a small number of Congress members from the majority party can have an outsize influence on the legislative process.
For example, the Democrats’ narrow majority in the Senate allowed opposition from a small group of senators to delay passage of US President Biden’s Inflation Reduction Act. In extreme cases, this could increase the risk of the federal government failing to raise the debt ceiling in a timely manner or to pass necessary spending plans to boost the economy when needed.

As such, a presidential candidate’s policy pledges are by no mean absolute. This will also depend on whether the next president has the backing of the Congress. They could use executive powers to push through some policies, but this could be challenged in courts or overturned by future presidents.

In India, current opinion polls suggest that Prime Minister Narendra Modi’s Bharatiya Janata Party could retain a majority in the Lok Sabha – the lower house of parliament – in the general election that should take place around May 2024. This should allow the government to maintain its economic reform momentum and potentially attract more foreign investment into infrastructure and manufacturing.
In Indonesia, President Joko Widodo will need to step down after he completes his second term. The next president is expected to play a key role in the country’s ongoing transition towards developing its infrastructure as well as harnessing its natural resources, including nickel, to be part of the new energy revolution.

For the economies of India and Indonesia, the potential for more reform and continued efforts to develop their manufacturing industries would be constructive for long-term growth, especially as more international companies look for alternatives to reduce concentration in their supply chain and diversify away from China.

Supporters of India’s ruling Bharatiya Janata Party light firecrackers as they celebrate winning elections in three states in Srinagar, Indian-controlled Kashmir, on December 4, 2023. Photo: AP
Taiwan’s presidential and Legislative Yuan elections on January 13 carry geopolitical importance as the presidential candidates’ campaign and the outcome of the vote could influence US-China relations in the medium to long term. Nevertheless, the global investment cycle and demand for semiconductors will be the dominant drivers of Taiwan’s equity market.
One piece of good news is that Beijing and Washington have agreed to resume high-level military communication. This should help to limit the risk of escalation in the event of accidents or errors.

Although there is plenty of research on historical market reactions to different government configurations or different years of a presidency, its ability to forecast future market performance is limited. Ultimately, the prevailing macroeconomic conditions, monetary and fiscal policy stances, and corporate fundamentals have a much greater impact on asset returns.

While historical data indicates that returns are typically lower and volatility is higher during election years, this trend was distorted by events such as the tech sell-off in 2000, the 2008 global financial crisis and the wild market swings of the Covid-19 pandemic. There is usually an increase in market volatility leading up to the elections because of uncertainty, but this tends to dissipate once the results are announced.

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management

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