More than half of the world’s population will head to the polls in 2024 with the US and UK among numerous countries with potential political upheaval in the remainder of the year.
It is a tricky period for politicians, according to Jean Boivin, head of the BlackRock Investment Institute, who said voters are “expressing frustration” with the ongoing rising cost of living around the world. Yet a change in government may not be the catch-all solution, he warned.
“We see many incumbent leaders or challengers constrained in any response, notably due to high public debt somewhat tying their hands,” he said.
Taking the US as an example, Boivin noted both incumbent president Joe Biden and former president Donald Trump – who will do battle once again in the upcoming election – swelled fiscal deficits to stimulate growth during the Covid pandemic, leaving them somewhat hamstrung.
“No matter who wins, deficits are set to remain historically large. Neither is charting a path to a sustained reduction in deficits,” he said.
In fact, both presidents could increase inflation through their measures. Trump has proposed a 10% levy across-the-board tariff for imports and a 60% tariff on Chinese goods, while Biden is expected to keep his current protectionist policies, like higher tariffs for some sectors, industrial policies favouring domestic production and the use of export controls.
Meanwhile, changes to immigration would have implications for inflation as the US faces a shrinking working-age population, said Boivin.
“On energy policy, the Inflation Reduction Act (IRA) and its low-carbon transition investment incentives are in focus. If Republicans control Congress, they may revise or repeal parts of the IRA to fund tax cuts.”
It is for this reason he believes the Federal Reserve will need to keep rates high for longer, as increased deficits should lead to persistent inflation.
“We think that, and markets needing to absorb large bond issuance, will spur investors to demand more term premium, or compensation for the risk of holding long-term US bonds,” he said.
However, the firm is bullish on the US equity market, maintaining its overweight position, although Boivin added that he will “eye the key policy areas of the presidential election”.
“US stocks notched fresh highs last week and are up nearly 13% this year,” said Boivin, although all eyes are currently on whether the Federal Reserve will cut rates in the near future.
“We expect key data – like last week’s US payrolls and this week’s US CPI – to drive Fed decision-making. Even with easing likely on the horizon for the Fed and already underway elsewhere, this is not your typical rate-cutting cycle, in our view.
“The red-hot US payroll data reinforces what an unusual environment this is for the start of a global easing cycle. We don’t see central banks cutting far and fast.”
Away from the US, the Indian election threw up a moderate surprise. Although prime minister Narendra Modi secured a third term, he had to enlist help through a coalition after failing to win a majority.
“That could slow some reforms – but it doesn’t change the long-term benefits from the confluence of mega forces, like a young population and digitalising economy,” said Boivin.
In Europe, despite the resurgence of right-wing parties in recent years centrist parties are still expected to keep control of the European Parliament, although he questioned whether certain governing parties could struggle, such as French president Emmanuel Macron who called a snap election in France after his party suffered a big loss.
In the UK meanwhile, a decisive victory for one party could “create the political breathing space to address the UK’s structural issues, such as weak productivity growth”, said Boivin.
“Beyond potential policy changes, a July election could allow the Bank of England to start cutting rates once it’s over – a reason why we like UK bonds. On a strategic horizon of five years and longer, we like government bonds in the euro area and UK on expectations for lower interest rates.”