How investors should play the UK, French and US elections
The stories that matter on money and politics in the race for the White House
When I was a pup, everyone driving to and from Sydney airport from the north would crawl through the beautifully wide, tree-lined roads of Surry Hills. Wouldn’t this suburb be bonza without the traffic, we all agreed.
And sure enough the cars vanished when the Eastern Distributor tunnel was opened in 1999 — just as everyone knew they would when the project was given the green light half a decade before.
Yet house values in the area leapt, as if surprised. They rose a bit in anticipation, but nothing like what followed. I often think about Crown and Bourke Streets when investors are advised to “buy on the rumour and sell on the fact”.
Often the opposite happens, it seems to me. Prices only wake up when the known future hits them in the face. This happens a lot in dealmaking, for example. Value is realised by the mere announcement of a hostile bid.
What is or isn’t discounted in asset prices is a hot topic, with markets digesting polls in the UK, France and the US. That’s a third of global output right there — and almost 80 per cent of the MSCI World index.
If I am wrong, and prices are efficient, then pondering who will win elections, and trying to work out which investments will out- or underperform based on manifesto pledges, is a fool’s game. There is no arbitrage to be reaped.
Labour promising a Green Industrial Revolution in the UK, say. But surely the implications have been baked into the share prices of National Grid and SSE for months, if not years. Haven’t concrete and steel suppliers already anticipated higher infrastructure spending?
On the other hand, what if the Crown and Bourke Effect (copyright 2024) dominates? Already it seems as if thousands of British investors woke up on Friday saying: “Blow me down, there’s been an election and Labour has won. We should buy some domestic housebuilder stocks.”
Of course, the investment research business also abhors an arbitrage. Every day sees another report showing the S&P 500 does better under Democrat administrations — so buy if Biden wins. Or that French equities underperform when the far right gains votes — so sell.
Such analysis would be redundant if clients believed in efficient markets. We aren’t talking about new information here — obviously that moves prices. But Labour said it would build more homes long ago. Housebuilder share prices shouldn’t move a penny come election day.
They will move over the coming months and years, however, if not much at first — just as all stocks do. For me the problem is not that investors fail to see what is right under their noses (like a huge tunnel being built), rather that price expectations rarely comply.
Hundreds of case studies come to mind, but in terms of sheer size and incorrectness (relative to what seemed like an obvious call beforehand) consider the oil and gas sector in the US over the past two administrations.
Before former president Donald Trump came to power in 2016, he invited 20 energy bosses to Mar-a-Lago and promised them massive tax and regulatory favours. Only by shooting the black stuff out of his ears could he have appeared more pro-Big Oil.
Worth a punt then, the average investor might have thought. And indeed the S&P 500 rose by more than half during Trump’s term, a better result than Barack Obama’s first four years in office. The oil and gas sector, though? Down by two-thirds.
Roll forward and president Joe Biden, seeking a second term, wants to transition the US away from fossil fuels. Once elected, his Inflation Reduction Act contained $783bn of green-related spending and incentives, according to the Congressional Budget Office.
So it wouldn’t have been ridiculous to suppose that the largest piece of legislation in global history to address climate change might be awkward for domestic oil and gas companies. Wrong again. The sector is the fourth best performing (out of 163) of Biden’s administration. Better even than tech, if you exclude Nvidia.
Why were investors wrongfooted on both occasions? After all, they had good knowledge of Trump’s and Biden’s plans for energy beforehand. The answer has nothing to do with what was in the price already. It is simply that policy was overwhelmed by larger forces.
Next to recessions, pandemics, the actions of Opec, demand rebounds or supply-side shocks following the invasion of Ukraine, the words and actions of Trump and Biden were irrelevant. So much so that prices did the exact opposite of what would be expected.
And if global issues can swamp the most powerful nation on earth, what chance is there that a UK-listed, yet global, pharma company such as AstraZeneca will outperform the FTSE 100 simply because Labour says it will spend more on healthcare?
Zero chance. Sure, Astra could beat the index because patents are extended, new drugs discovered and approved by regulators, or because management announces a radical cost reduction programme. A takeover rumour would also help.
But don’t pretend that Sir Keir Starmer has anything to do with it. That would be like saying the make-up of the French parliament has a bearing on luxury sales and hence LVMH’s share price, when Asia accounts for 40 per cent of revenues.
Even stocks thought to have skin in the game, such as British water utilities (Labour intends to put them under “special measures” if they’re failing), or French oil companies (Le Pen’s Rassemblement National wants to cut sales taxes on petrol this summer), have barely moved in the past month as polls neared.
My election advice for investors then? Prioritise valuation as ever, and if markets are shocked when a result comes in — as Sydneysiders were when Surry Hills went quiet — take advantage of prices that seem out of line. Ignore everything else.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
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