Navigating the global election cycle of 2024

Quick read:

• In 2024, more global citizens will cast a ballot in a democratic election than ever before.¹ Though attention on November's US election is especially high, market relevant elections are also due to take place in Japan, the UK, India, Mexico, and South Africa.
• Elections are events that can move markets, but in different ways across different countries. This creates macro and market uncertainty, and greater cross-country dispersion that creates opportunities for global tactical investors.
• Tom Becker, portfolio manager of the BlackRock Tactical Opportunities Fund, tells us how his team manages election risk in their investment process, how they've navigated some past events, and how they're positioning for some of the upcoming global contests.

How do you think about election risk as a macro investor?

As a macro investment team, we focus on country-level fundamentals like growth, inflation, and policy. Elections are common occurrences across our investment universe, and we’ve navigated events with both local and global asset price impacts. A simple way to think of elections is as binary events that are associated with both policy and market risk on a known future date.

As a general principle, we don’t position our portfolios based on a forecast of the outcome of any election. In our experience, even with perfect foresight of the outcome of a binary event, it can be difficult to anticipate the associated market reaction. If a particular candidate wins, will stocks in that country go up or down? What about the government bonds or the currency? It's not always what you expect and we’ve seen plenty of surprising market reactions.

While there is no single playbook for elections, we have sometimes observed market dynamics on both side of these events. Instead of trying to predict and position based on an anticipated outcome, we look for potential market pricing dislocations in the run-up or aftermath of these types of events. Outsized market moves can sometimes present tactical investment opportunities. For example, in the run-up to elections, we sometimes observe a more muted asset price response to growth or inflation data. Though it is hard to know for sure, some sub-sets of investors may be more cautious to express active views based on fundamentals in the run-up to elections. On the other end, in the aftermath of elections or referenda, we have sometimes observed large asset price moves that feel outsized relative to the potential impact on fundamentals. It is not uncommon for these market moves to be sentiment-driven overreactions.

2024: The year of the election

What are some past elections across the globe that have impacted portfolios?

The BrExit referendum in 2016 is one example of a national vote that catalyzed large global asset price moves. Leading up to the vote, uncertainty about the outcome was high. Consistent with our general approach to binary risk of this nature, we did not position portfolios for either outcome. However, in the hours after results became clear, Japanese equities sold off sharply, declining ~7% in the overnight session.² Viewing this as an overreaction, particularly given the limited economic linkages between the UK and Japan,³ we took advantage of the opportunity to tactically buy Japanese equities at attractive prices.

A few months later, in the run-up to the 2016 US presidential election, we had insights that US growth and inflation data were improving but interpreted market pricing as not fully pricing these macro developments. We viewed the impending event risk as a potential reason for that disconnect. By maintaining short US bond positions, founded on the growth and inflation data rather than any view on the election, we were rewarded with the swift repricing that occurred immediately in the aftermath of the election.

More recently, leading up to the Taiwanese election in January of this year, we observed evidence in flows data that investors were taking down risk ahead of the election. However, we had a positive outlook on earnings growth prospects of listed Taiwanese companies. With an expectation that less uncertainty following the election – regardless of the outcome – could bring investors back and drive market prices higher we utilized this opportunity for a tactical, active investment in Taiwanese equities.

Do global elections impact macro fundamentals?

Elections can cause market pricing to become disconnected from macro fundamentals in the short term as discussed above. But there are also ways that elections directly impact macro fundamentals. These sorts of insights on how elections can impact growth or inflation can be valuable because they tell us something about fundamentals that may be related to the election cycle but doesn’t involve making a prediction about the outcome of any particular election.

For example, fiscal policy is a market relevant macroeconomic fundamental that has historically shifted during election years. Incumbent governments typically have an incentive to boost economic activity into an electoral contest and that means we often see larger budget deficits in election years.⁴ Since higher government spending can boost growth and also increase government bond issuance, we incorporate this link between elections and macro into our tactical positioning.

In 2024, there are important and tightly contested upcoming elections in the US and UK and fiscal insights are helping to inform our portfolio positions. As shown in the chart below, both the US and the UK typically have larger budget deficits during years with parliamentary or presidential elections. Today, however, we see somewhat atypical dynamics in the UK. Given the budgetary and government bond market turmoil experienced two years ago, the incumbent UK government has shifted towards a fiscal policy stance aimed at reducing the fiscal deficit over time. This contrasts with the US where federal spending on infrastructure programs continues to swell deficits. These divergent fiscal policies shift the relative attractiveness of these government bond markets and have contributed to portfolio positioning long UK Gilts and short US Treasuries.

Budget deficits have tended to be larger in election years - but US and UK spending dynamics are diverging heading into late 2024 elections

How do you think about some of the other countries with upcoming elections in 2024?

The chart below shows the outsized importance to financial markets of the November US election given the large share of global market capitalization listed in the US. However, the enumeration of countries also highlights that many other economically important countries are headed to the polls in the coming months.

Elections' impact on global markets will grow as we progress through 2024

This summer’s election in Japan, for example, could impact macroeconomic fundamentals given the structural shifts that have been occurring in that economy. Japan has been running large deficits in the past few years and now, as monetary policy rates move positive, there could be greater perceived constraints on government spending going forward. With growing evidence that the Japanese economy has escaped its debt-deflation trap and should be able to maintain positive inflation and wage growth, shifts in the outlook for fiscal policy will be important for the Bank of Japan. We are positioned outright short Japanese government bonds and long Japanese equities in the cross-section.

There are also a few elections on the horizon in large emerging markets. South Africa, for example, has a tightly contested election approached as it grapples with a weak local economy and deteriorating external balance. We are positioned short South African rates based on the weak fundamentals but are mindful that they could intersect with growing electoral uncertainty. In contrast, we see value in receiving onshore rates in India. India is a country where there has not historically been a large difference in budget deficits between election and non-election years and heading into the upcoming election the Indian government is running a relatively austere budget stance. Government spending that is taking place is focused on a capital expenditures program that is resulting in strong manufacturing activity⁵ in the country.

As tactical investors, we will continue to shift positions as macro fundamentals and market pricing evolve heading into – and out of – each of these contests. But in general, we view the packed election calendar as reinforcing two key features of the new regime ushered in by the pandemic: macro and market uncertainty, and greater cross-country dispersion that creates opportunities for global tactical investors.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance.

To obtain more information on the fund, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit Tactical Opportunities Fund.

The Morningstar RatingTM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

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