The Voting Machine

The Voting Machine

almost 5 years ago3 mins

Mentioned in story

Elections in recent years, months, and weeks have had some unexpected results – and investors caught off guard have scrambled to readjust their portfolios. But are they sometimes too hasty?

🕰️ Recap

  • In June 2016, the UK defied expectations by voting to leave the European Union

  • In November 2016, the election of Donald Trump as US president also surprised investors

  • Between November 2018 and March 2019, the British Parliament failed to agree on how best to leave the European Union, despite several rounds of voting

  • And last week, European election results bolstered the Italian government's ambitions of increasing its spending – while precipitating national elections in Greece

🔗 Connecting the dots

Over short periods, the stock market acts like a voting machine: investors effectively vote on whether they like a company by buying or selling its shares each day. Over longer periods, however, it’s a weighing machine: share prices ultimately reflect a firm’s substance and value. Political electoral results similarly have short-term consequences for investors and markets – but also important long-term ramifications for countries’ economies and the value of local investments.

Take the 2016 US presidential election, for instance. A win for the Republican candidate, a certain D. Trump, led investors around the world to buy up stocks. They may have (rightly) believed that the new US administration would follow through on its promises to lower taxes. That would (and did) give companies more money to either reinvest in growing their profits or else provide shareholders with bigger returns via dividends and share buybacks. It also helped give consumers some extra cash to splash.

But there was no such appetite for stocks after November’s US midterm elections. The result, which was as expected, meant gridlock in Congress on domestic matters, since neither of the two main camps was left with an easy route to getting new laws passed. The lack of consensus among legislators has also delayed Brexit – with the resultant uncertainty leading investors to shun British assets, including the pound. And investors may be wise not to expect any major changes to how the still-28-country European Union’s run following last week’s vote: Italy’s cavalier spending plans have already been challenged by the bloc.

🥡 Takeaways

Opinion polls have become pretty unreliable forecasters of election results in recent years (and economic survey data has also appeared to lose some of its predictive power). Yet election results themselves continue to affect valuations of things like countries’ currencies. And whether you’ve directly bought a particular currency or not, as an investor, your wealth is affected by these currency swings. Even if all your investments are in domestic companies, they’ll probably be buying from and selling to foreign firms – so currency moves affecting their profits will impact yours too.

Every year, public companies hold meetings where their investors can vote on the company’s plans for the year ahead, including executive pay. While these votes aren’t always binding, just like in a political election, investors can use them to express support or disdain for the current leadership. Just in the past fortnight, BP shareholders voted to increase climate disclosure at the oil giant, although Facebook’s management avoided calls for change at the top.

🎯 Also on our radar

German mega-insurer Allianz announced two acquisitions of smaller British rivals on Friday worth a combined $1 billion, perhaps taking advantage of the fall in the pound’s value versus the euro to snag a bargain. A key way in which insurers make money is investing the premiums customers pay for insurance coverage in bonds that earn the insurer a profit, from which it can then pay out any claims. The recently heightened appetite for safer investments like bonds may not just be down to concerned investors selling stocks, but also insurers’ increasing activity.

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