Investors should position themselves now
Parties in general are known to be spendthrift. Rising government debts can cause concerns for investors. Higher deficits usually go hand in hand with rising interest rates, which are toxic for financial markets. Against this backdrop, many stock market investors view political developments in Britain and France critically.
In Britain, the Labour Party led by Keir Starmer has achieved a landslide victory. The chaotic Brexit course of the previously ruling Conservatives and the resulting economic consequences had caused growing unease among the British public. Starmer has already been appointed as the new Prime Minister. However, it seems unlikely that under Labour in the Kingdom, the national debt will get back on track.
Starmer and his Labour colleagues will still face the legacy of his predecessor Liz Truss. She wanted to cut taxes and finance it with increasing debts. Investors considered this unhelpful in fighting inflation and drove interest rates up significantly by buying fewer government bonds. After only six weeks in office, Truss had to resign.
The new prime minister in 10 Downing Street intends to invest more money in social housing. However, the experiences of Truss are likely to push the Labour government towards a reasonable counterfinancing.
Macron's Veto
In France, voters have carried out an even more pronounced shift to the left. However, it is unlikely that there will be wildly excessive public spending - public spending already amounts to 110% of the Gross Domestic Product (GDP). Since no party has an absolute majority in parliament, President Macron and his liberal party La République en Marche can block excessive spending plans of the future government.
Moreover, the stock market adage that political stocks have short legs may prove true again. The large stock market-listed British companies generate only about one third of their sales on the domestic market. In France, the share is even as low as 20%. For these companies, the stable development of the world economy plays a much more decisive role than the policy of the respective government.
The situation is different in the USA. In June, the national debt had risen to almost 34.8 trillion dollars, which corresponds to 137% of the GDP of 2023. However, both Democrats and Republicans are expected to continue spending after the presidential election in early November.
USA Loses Top-Rating
Among the Democrats, further spending programs like the Inflation Reduction Act (IRA) are to be expected in case of a re-election. Trump, on the other hand, has announced tax cuts again. The USA can still print money almost without limits, as almost all countries in the world want the Dollar as the world's leading currency. However, the United States have already lost their top rating in creditworthiness.
Now, something like a "Taper Tantrum" could happen again. Ten years ago, the US Federal Reserve announced that it would reduce its purchases of government bonds to recover the money it had pumped into the markets after the financial crisis. At that time, the decline in demand for government bonds caused their prices to fall and interest rates to rise. This time, a rising supply of government bonds, which are nothing more than Washington's debts, could have the same effect.
At a 25,000 Euro investment, approximately 45% should go towards stocks in a well-diversified portfolio. However, there might be stronger headwinds in the second half of the year due to rising evaluations. In terms of regional allocation, there is no way around Wall Street as the largest stock market in the world, but caution is advised. Investors should not forget the more favorably priced stock exchanges in Europe and emerging markets.
Approximately 45% should also go towards bonds and debt securities from creditworthy companies. Risk bonds can also be added to achieve higher yields. Furthermore, a diversifying element and given the limited supply, a mix in Oil is recommended. Lastly, larger cash reserves are advisable to buy back at potentially falling prices.
Reinhard Pfingsten has been working as the Chief Investment Officer at the German Pharmacists' and Physicians' Bank since September 2023. He previously held this position at Bethmann Bank and Hauck & Aufhauser Private Bankers.
This publication serves only for informational purposes and for the use of the recipient. It does not constitute an offer or solicitation on behalf of or in the name of the German Pharmacists' and Physicians' Bank.
- Investors may be wary of Europe's threshold countries due to rising government debts, which can lead to increased borrowing and potentially higher interest rates.
- Starmer's Labour Party in the United Kingdom plans to invest more in social housing, but it remains to be seen if they will find reasonable counterfinancing to avoid exacerbating the country's debt situation.
- The majority of sales for large British companies listed on the stock market come from outside the UK, making them less dependent on domestic policy.
- France's public spending already exceeds 110% of its GDP, and President Macron's liberal party La République en Marche can veto excessively spending plans due to the lack of an absolute majority in parliament.
- The USA's national debt has risen to nearly 137% of its GDP, and both major political parties are expected to continue spending after the presidential election.
- The Inflation Reduction Act (IRA) is a further spending program expected from the Democrats if they win the election, while Trump has announced tax cuts.
- The situation in the USA is different from other countries because it can print money virtually without limits and remains the world's leading currency.
- Reinhard Pfingsten, the Chief Investment Officer at the German Pharmacists' and Physicians' Bank, recommends investing 45% of a well-diversified portfolio in stocks, with caution advised in Wall Street due to rising evaluations.
- Pfingsten also recommends investing 45% in bonds and debt securities from creditworthy companies, as well as considering risk bonds, Oil, and larger cash reserves.
- ETFs, such as those tracking the Dax or stocks in Asia, like those in China's stock market, can provide diversifying opportunities in an investment portfolio.
