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Many Americans will be tuning in to tonight’s first presidential debate not just for the entertainment but to gauge what policies the candidates lay out and how they could affect their portfolios. But the truth is that nearly half the world’s population will face national elections this year, with several already concluded. It’s important to keep in mind that these elections will impact those portfolios with significant international exposure and those with U.S. exposure.
Here, we’ll recap elections that have taken place, discuss those set to come, and assess their potential impacts on portfolios.
Equity Exposures
As my colleague Chris Fasciano highlighted in his international equities blog, 64 percent of global market cap comes from the U.S. and roughly 36 percent comes from outside the U.S. When it comes to individual portfolio allocations, we often see even higher allocations to U.S. equities. Commonwealth’s Preferred Portfolio Services® (PPS) Select 100/0 model’s benchmark, for example, has 25 percent international equity exposure. In the PPS Select 60/40 model benchmark, international equity exposure is 15 percent of the overall allocation.
We often see portfolios come in with U.S. allocations of 80 percent or more due to home country bias, preferences of the advisor or client, the large gap between U.S. and international equities since the financial crisis, and embedded gains or tax reasons.
For the U.S. Equity Benchmark S&P 500 Index, according to FactSet as of March 2023, 40 percent of revenues (sales) came from outside the U.S. In addition, the sector with the most exposure to international revenues is the one that probably makes up the biggest component of investors’ equity exposure—with 58 percent of revenues (sales) in the tech sector coming from overseas. So, even if an investor is U.S.-oriented, they should be aware of the impact that countries outside the U.S. may have on their portfolio.
Source: FactSet as of March 2023
For those with more elevated international exposure, if we look at the weights by country of the popular MSCI ACWI ex U.S. Index benchmark, we see the following:
Source: Morningstar Advisor Workstation
Of these 10 largest countries, India and Taiwan already had their general elections. Mexico is not in the top 10 but is the U.S.’s largest trade partner and had its general election on June 2. The UK is set for a snap general election on July 4. France will have a snap legislative election between June 30 and July 7. The EU had its European Parliament election June 6–9. Tokyo, by far the largest city in Japan, is set to have its gubernatorial election on July 7, and there is the potential for an additional snap election in 2024 in Canada.
Elections Gone By
Taiwan. The year kicked off with the Taiwanese general election on January 13, with Lai Ching-te elected president and Hsiao Bi-khim elected vice president. Both are from former president Tsai Ing-Wen’s Democratic Progressive Party (DPP), so not much change is expected on that front. The big news was on the legislative side, where the Kuomintang won back a majority of seats in Parliament from the DPP. It was also the first time since 2004 that no party had a majority in the broader legislature. This divided legislature may slow down the progress of new legislation and reduce the power of the president and DPP.
India. Next up was the Indian general election, from April 19 to June 1. Narendra Modi was again elected prime minister and has since started his third term. Modi won by a small margin, but in the election of the Lok Sabha (i.e., the lower house of Parliament), Modi’s National Democratic Alliance (NDA) lost 60 seats. This loss will force his party to work with ally parties to pass items through the house. This may potentially slow down the pace of items like infrastructure spending, which has been a major focus of the NDA. This, in turn, may ease the pace of rapid growth we have seen in recent years that has driven up valuations in India.
Mexico. On June 2, Mexico voted for its new president, Congress, and Senate. Claudia Sheinbaum of the Morena party won. This is the same party as former president Obrador. The Morena party fared quite well, picking up additional seats in both the Senate and Congress, which gives Sheinbaum a fair amount of power on a national level. We will watch to assess how the relationship between Sheinbaum and the next U.S. president turns out.
Europe. The European Parliament election happened just a few days later, from June 6 to June 9. Ursula von der Leyen kept her position as leader, with 189 seats of 720 total. That said, there were gains in the populist parties. This election had a meaningful impact on France, in particular, which we will look closely at below.
Elections to Come
France. In the wake of the results of the European Parliament election and to the surprise of many, on June 9 at 9 p.m. local time, the French president dissolved the National Assembly and announced that a snap election would take place between June 30 and July 7 to elect a new National Assembly. This news put some pressure on the euro and strengthened the U.S. dollar, as questions about France’s future in the EU started to arise.
United Kingdom. Before Macron, UK Prime Minister Rishi Sunak requested the dissolution of Parliament in a nearly identical move to Macron. The move may not have been as swift, and this election will take place on July 4.
Tokyo. Finally, the Tokyo gubernatorial election will take place on July 7. Tokyo’s annual budget is 13 trillion yen or roughly equivalent to the national budget of Indonesia. It is by far the largest economy and population center in Japan. Incumbent Yuriko Koike is running for reelection and has been governor since 2016.
Portfolio Impact
In many of these elections, we have not seen the changes come at the presidential level but within the legislative branches, demonstrating that local races can have a broader impact. Beyond this, we have seen lower levels of power in each government from one party. We have also seen elevated levels of volatility within the EU, with two snap elections at the legislative level in France and the UK. We will continue to monitor these snap elections for their potential impact on the euro and, in turn, on U.S. strength in the short term.
Ultimately, it’s likely that the U.S. is still the most important election for portfolios. But as we watch tonight’s debate, it’s a lesson for investors to expand their view to the races beyond those of the U.S. president.
