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Pushing to the right
With all eyes on the polls this year, Kaspar Hense, Senior Portfolio Manager in our Investment Grade team, looks at how markets have reacted to the latest round of elections in the EU, and the team’s portfolio positioning.
Globally, 2024 has seen a significant political surge to the right, be it the Republican party gaining momentum in the US, or in Europe more recently, where in nearly all countries the so-called extreme right is gaining popularity and, in some cases, power. Considerable gains were made in France this summer, and more recently, in the German federal state of Thuringia.
While the reasons are diverse, typically anger and ‘left-out’ sentiment seem to be part of this surge, along with increased uncertainty brought about by the Russian-Ukrainian conflict and pandemic-induced inflation. Across Europe, there is mounting concern in the political establishment and maybe a growing sense that past policies have been failing voters. In Germany, around 16% of all young voters aged 16-24 voted for AfD, around three times as many as five years ago, while only 11% of this cohort voted for the Greens, who are part of the Germany's ruling federal coalition1. In past generations, it has been the young who have been more inclined to lean to the left and also to embrace a green, environmentalist mindset.
Whatever the outcome of these long-term geopolitical risks for welfare and peace, the nearer-term economic distortions are simpler to forecast. For example, Trump’s fight against immigration and global trade will have immediate repercussions on the dollar and inflation. This is because immigration policies tend to bring along lower aggregate growth but also higher wages and an even tighter labour market, which fosters job security for some but lowers productivity for others.
In Europe, the situation is more delicate. Immigration and defence policies are matters for the EU, as opposed to being decided by national governments. At the EU level, there is a push for some more nationalistic economic policies, spearheaded by Draghi. The upcoming Draghi report is likely to focus on establishing a larger military defence, protectionist trade policies and ways to address ‘the less favourable attitudes towards immigration’, as highlighted on previous occasions.
With regard to markets, while election outcomes in France and especially at a regional level in Germany may be disturbing, they are not “market moving” at present. The shift to the right in Italy with Meloni, a more pragmatic right-wing leader who has supported some of the European mechanisms regarding China (i.e. Italy leaving the Chinese belt-and-road project, which was welcomed by the EU) and the front against Russia, has been seen as positive for markets.
Meanwhile in France, markets have been more fearful of higher public spending proposed by populists from the right and the left than the stance of Le Pen’s more inward-looking agenda. In Germany, the AfD does not have a concise agenda in most areas (although in its defence, neither does the left-wing equivalent, the BSW party), despite being against the establishment and pro-Russia.
At the start of the year, we were positioned short France in our BlueBay Investment Grade Global Government Bond Fund for fundamental reasons, but we reduced our underweight slightly after the first round of the elections. This was because fear of the political impact on markets from the right diminished. We also started to feel less concerned that the extreme left would come into power.
We closed our overweight in Spain, however, in the second quarter, taking the view that budget negotiations for next year could drive spreads of European sovereigns wider, before we see the EU agree on some EU-financed government spending. If this happens, it would be a further step towards a fiscal union.
In that regard, the market will continue to ignore these developments for the time being, as it awaits the Draghi report, with the expectation that Brussels will likely act on the demand of the people for broader security measures for employment, geopolitical strength, and the sentiment of ‘not-being-left-out’ to increase spending in leading technologies.
1 www.dw.com
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