Banca&Mercati

2012 will be a year when investors must track political developments closely. Between a spate of key elections and a wave of popular protests, the weight of global public opinion will be a key risk factor in the year ahead. Arguably the most important political transitions will take place in United States, France, Russia and China

by Tina M Fordham, senior global political analyst, Willem Buiter, chief economist, and Robert Buckland, managing director and Head of Global Equity Strategy at Citi Investment Research
2012 promises to be a very political year. Between elections and political transitions taking place in many of the world’s most economically powerful and geopolitically significant countries and a wave of mass popular protests, shifting public opinion – perhaps the most volatile and influential Vox Populi for decades – will be a key risk factor in the year ahead.

Global Election Timetable (Source: IFES Election Guide – Election Calendar, World Events Calendar – Council on Foreign Relations, Citi Investment Research and Analysis. *TBC – date to be confirmed)

With many of the world’s most powerful leaders struggling to maintain public legitimacy amid the economic downturn, a focus on short-term populist, nationalist and protectionist policy measures instead of comprehensive long-term reforms will likely increase. In this environment, the potential for self-inflicted policy failure remains the most significant risk.
Citi Global Equity strategist Robert Buckland notes that any resolution to the prevailing political uncertainty could provide a positive surprise to equity markets that have moved away from their historic emphasis on company fundamentals and are now focused on macro concerns, noting that politics were not an important driver of equity markets prior to 2008.
For some sovereigns, according to Citi chief economist Willem Buiter, the only way to relax budget constraints even temporarily would be through a discretionary, opportunistic default on sovereign obligations. The temptation to do so is likely to increase in the run-up to a closely-fought election. These forces are increasing the uncertainty precisely when investors are looking to policymakers for decisive action.
The period ahead of elections is unlikely to see policymakers attempt reform. In the past, governments may have been tempted to indulge in fiscal loosening ahead of an election. Today, budgetary constraints make the notion of “sharing the proceeds of growth” through fiscal largesse a remote prospect for most leaders; instead, as Jean-Claude Juncker, head of the Eurogroup famously remarked, “we know what to do, we just don’t know how to get elected after we do it”.
Adding to the mix and increasing the difficulty in forecasting electoral outcomes is the shifting social and political context, particularly in the mature industrialised democracies, where new actors, parties and ideas are vying for the support of increasingly disenchanted electorates. Although these new actors are gaining strength, they are highly unlikely to win. Instead, their impact should include reducing the mandate for the party that ultimately wins and introducing unorthodox ideas into the mainstream political debate.
In the US, the influence of the Tea Party movement on the Republican nomination process has been notable, even though formally Tea Party-aligned candidates have not succeeded in securing significant support. In France, the National Front is campaigning on a de-globalisation platform and advocating a return to the franc, pushing the political debate to the right.
Taken together, the impact of this concentration of important elections amid a worsening economic outlook threatens to have a significant impact on the overall business, investment and regulatory environment, as well as prospects for recovery.
Although forecasting election outcomes may prove more challenging than usual, in our view investors should do more than try to identify the winners. Instead, understanding the changing context for these elections and shifting global public opinion may prove more useful for anticipating the post-election environment.

Few G20 leaders have approval ratings above 50% (Source: CIA, Factbook, IFES, National Political Spectrum, BBC, Bloomberg, Nielsen (Australia), Yahoo News, Gallup, Guardian (IUK), Euobserver, CIRA)

Of the 59 countries in the world that will see elections or political transitions at some level in 2012, 6 are members of the G20, the world’s largest economies. Arguably the most important from a macro economic and market perspective are the United States, France, Russia and China. Taken together, these 4 countries not only comprise 40% of global GDP, but hold 4 out of the 5 permanent United Nations Security Council seats and represent nearly 27% of the global population. The challenges these 4 countries face encapsulate the most pronounced political risk themes: the ongoing political battles over timing and fiscal burden-sharing of a resolution to the sovereign debt problems in the United States and France; antiestablishment sentiment and demand for reform in Russia, and a new generation preparing to take the reins in China.
Not only the identity of the most senior leaders but the composition of the legislature will matter, especially in the US, where political polarisation and divided control over the White House and the Congress could produce a potent brew of policymaking paralysis. Assessing political risk will therefore involve scrutinising developments to a more micro level than ever before. This was another key lesson of 2011, given the importance of provincial German elections and the seat distribution of the Slovak parliament in the passage of crisis measures in the Eurozone. In a more globalised world, national elections will bear international implications, and even local considerations will have implications for investors, a phenomenon the commentator Moises Naim referred to as “the dangerous cocktail of global money and local politics”.

Tina M Fordham
Willem Buiter
Robert Buckland