2024 Elections: Big Bark, Little Bite

Despite the win of the presidency by the pro-independence Democratic Progressive Party (DPP), the party did not see a decisive victory and lost its majority in the legislature. The outcome resulted in little change in policy with new President Lai Ching-te stressing he would support the cross-strait status quo with China. Shortly after Lai took office in May, Beijing halted tariff suspensions/discounts on 134 items listed under a trade deal with Taiwan. In September, the Chinese government announced it would scrap its additional tariff exemptions on 34 Taiwanese agricultural exports to China. Yet, these symbolic moves impacted only about 10% of the value of Taiwan's exports to China.

Taiwan's stocks delivered a nearly 30% total return so far this year, as measured by the MSCI Taiwan Index in U.S. dollars.

The split control between the legislature and the presidency leads us to not expect significant changes on the issue of pension reform, or any other major policy initiatives that might impact markets. While South Korea's stock market has suffered losses this year, they can be attributed to the performance of Samsung and SK Hynix. These are the index's two biggest stocks, together accounting for over one-third of the MSCI Korea Index and have both plunged about 30% since July 11 on the early August global unwinding of the yen carry trade and declining global semiconductor sales for laptops and cell phones. The decline is not likely tied to any changes in domestic policy.

Sheinbaum's landslide win and populist policy proposals, including judicial reforms, seem to have originally spooked investors with the MSCI Mexico Index falling by -13% in the days following the election in U.S. dollars. But a month later, the index had recouped nearly all of those post-election losses. Since then, Mexican stocks have slumped again, with the timing aligned with the global yen carry trade unwinding rather than the domestic policy agenda.

Stocks in the Netherlands have produced a total return of 11% so far this year, as measured by the MSCI Netherlands Index in U.S. dollars. The index was dragged down recently by ASML Holdings, N.V., the maker of equipment used to produce Nvidia's artificial intelligence (A.I.) chips.  This stock accounts for 40% of the MSCI Netherlands Index and has fallen since July 11th along with other global chip-related stocks.

A tighter budget might imply a diversion of funds from investments in infrastructure, which have been critical to growing India's manufacturing base, toward more popular social handouts. But the first budget of the new coalition government revealed little change in policies; the budget featured a plan to reduce the deficit while maintaining healthy levels of infrastructure spending and added a component designed to boost job growth. With India's growth supporting policies intact despite the election outcome, the total return of the MSCI India Index is up 24% so far this year, as measured in U.S. dollars.

The populists in the EU parliament are experiencing a challenge similar to what Italy's populist Prime Minister Meloni has encountered as she finishes her second year in office: How to fulfill generous campaign promises while shrinking bloated budgets. Figuring out how to pay for their pledges is especially complex in the EU; watchdogs in Brussels tend to keep a close eye on government spending, reining in any excessive deficits. In early September, the release of a long-awaited report by former European Central Bank President Draghi on the future of European competitiveness is expected to translate into proposals for industrial policy, regulatory reform, and spurring investment in technology, green energy infrastructure, and defense. But political and financial constraints are likely to limit how much the EU will be able to deliver on these targets.

On the one measure they seem to be united on, trade protections, the outcome still isn't assured. In July, the EU put in place provisional tariffs on Chinese-made electric vehicles as part of its ongoing investigation of alleged Chinese subsidies. A vote in November would be needed to make them permanent. Fearing Chinese retaliation, several EU countries (including Germany) oppose the tariffs with nearly a dozen abstaining from an advisory vote on the issue, which suggests many are undecided on the measure. They may be waiting to see China's reaction and the outcome of the U.S. election (and the potential prospect of increased U.S. tariffs on China's goods).

The MSCI EMU Index that tracks stocks in the European Monetary Union in U.S. dollars has seen a total return of 12% so far this year, showing little negative effect from the populist parties' increased presence in the legislature.

New U.K. Prime Minister Starmer's main challenge will be working with already extended budget deficits that leave little room for new spending priorities coupled with an election pledge not to raise income, payroll, or VAT taxes, and a debt-to-GDP ratio over 100%, according to Office of National Statistics. The new chancellor said potential increases to capital gains and inheritance taxes will not be enough to cover the budget hole, adding there will be "more difficult decisions around spending, around welfare, and around tax."

The MSCI United Kingdom Index has produced a total return of 15% measured in U.S. dollars so far this year, seemingly unconcerned about the prospect of tighter fiscal U.K. policy.

Markets began to reverse June's losses after the first round of voting on June 30, with the margin of victory by the National Rally being insufficient to claim a majority in the second round. But even though the surprise outcome and hung parliament leaves some uncertainty, the main drag on France's stocks this year is more likely tied to the slump in Chinese consumer spending on French luxury brands such as LVMH, the largest stock in the MSCI France Index.

Michelle Gibley, CFA^®, Director of International Research, and Heather O'Leary, Senior Global Investment Research Analyst, contributed to this report.