Merlin Weekly Macro: Politics must confront some difficult issues

“The political tectonic plates are shifting”, declared George Galloway, the runaway winner representing the Workers Party of Great Britain in the Rochdale by-election. Ever since Labour’s campaign imploded following their candidate’s anti-Semitic comments on the stump and concerns that the party has failed so far to rid itself of being anti-Jewish, in a strongly left-leaning constituency with a large Muslim population this was the opportunity for small parties and independents to make hay. All three main parties, Tory, Lib-Dems, and especially Labour losing a big majority, performed badly; it will come as little comfort to the Conservatives that Reform UK did poorly too despite Rochdale returning a 60% Leave vote in the Brexit Referendum.

By-elections often throw up strange results (though for the Tories, the consistently losing streak since 2019 foretells of deep structural problems). On the assumption that Labour does not repeat the same mistake in Rochdale at the General election, Mr Galloway’s latest sojourn in Westminster may prove short-lived, if noisy and eventful along the way; time will tell whether the tectonic plates really have shifted for him

Challenging norms: difficult and controversial issues

But where Galloway’s observation certainly does have broad resonance is the extent to which across the western democracies political norms and the traditionally stable centrist parties of post-war politics are increasingly being challenged, and not only challenged but beaten. It makes predicting outcomes more difficult, future political stability less certain. At its core is the extent to which the political establishment is still in touch or not with its electorate.

Religion

Here, the Rochdale result had little to do with whether the constituency should have a Primark store (as Galloway vociferously championed), but instead was very clearly dominated by events in the Middle East with Galloway leading a strongly pro-Palestinian agenda. This week in America, the war in Gaza was also at the forefront in the Presidential primaries: Michigan is a state with a significant Muslim population; while Joe Biden won the Democrat vote convincingly,  a very loud warning shot was fired across his bows that Muslim support cannot be taken for granted unconditionally, reflecting dissatisfaction with his stance on not unequivocally supporting a Gaza ceasefire (equally in this political minefield, the powerful US Jewish lobby is arguing the case for the justness of Israel’s actions). At Westminster, again with the Middle East at the centre of a complex and rancorous domestic political row, a more enduring disagreement pervades about the public’s right to demonstrate and the bounds within which such events are conducted and policed; when the Prime Minister uses the term “mob rule”, you can be sure the boundaries between democracy and perceived anarchy are being tested if not inflamed. Whether by the time of the US and UK elections in the autumn the Middle East conflict is still a deeply divisive political flashpoint remains to be seen, but there is no doubt that sectarianism and the subjects of race and religion are very live political issues.

Immigration and race

If the Middle East has been a recent phenomenon with political consequences in the West, immigration is a familiar and enduring topic of debate. Whether from a moral or an economic standpoint, it is one of the dominant factors behind the polarisation of modern politics, often rancorously so. In the US, the Republican right is determined to ensure that its anti-immigration stance will be at the very heart of its November Presidential election campaign. It is already playing out today in Congress with real consequences: in the seemingly never-ending row in Washington about Government borrowing limits and spending, right-wingers have made the 2024 military and financial aid packages for Ukraine, Israel and Taiwan conditional on Biden’s administration curbing illegal immigration immediately. Those packages totalling around $90bn are currently frozen with obvious consequences particularly for President Zelensky who was earmarked to receive two thirds of the sum. “Weaponised” is a term increasingly used when a topic has been hi-jacked for political gain; in the US, the subject of immigration being conflated with military aid, its application is almost literal.

Immigration was without doubt a factor in the UK Brexit referendum; the current administration’s deep travails over its Rwanda deportation policy remains a political quagmire. On the Continent, immigration has also been a key factor behind the rise of a number of nationalist parties across the EU: Georgia Meloni’s Brothers of Italy party; Le Pen’s National Rally party in France; the Freedom parties in Austria and Holland; the AfD in Germany; nationalist parties (and governments) in Slovakia and Hungary. All are challenging traditional centrist parties, forcing change, in the case of Italy, Holland, Slovakia and Hungary successfully. Notable has been the reaction to a poll slump for Chancellor Olaf Scholz in Germany: a centre-left liberal and libertarian heading a fragile and deeply unpopular coalition government, against his core conviction he has been forced to bring forward a new raft of policies to deal with German immigration including enforced deportation. A seemingly intractable problem and however uncomfortable and emotive a subject, immigration is a dominant factor in 21ˢᵗ century politics.

Gender

So too are gender politics. A deeply divisive subject in the broader world of “woke” politics, as Allister Heath fairly pointed out in the Daily Telegraph, whatever your own personal views, the political class is all at sea here in an area which inflames passions on both sides of the argument. Even where it likes to think it has command of the situation, elephant traps abound. Nicola Sturgeon might now be being investigated for financial fraud against the SNP, but her political nemesis was her determination to force through an unpopular Gender Reassignment Bill in Scotland and then to “weaponize” the subject as part of the Scottish sovereignty debate by deliberately picking a fight with the Westminster government which she lost. That might be a very narrow spotlight, but the extent to which the pejorative and ill-defined term “woke” pervades government, politics, business and broader society is increasingly unavoidable however divisive.

Other forces at work

Less a party than a protest movement with increasing populist support (though unreliable, as the Dutch BBB farmers’ party found last year when in a matter of months its share of the poll rose from nowhere to 22% and is now 5%), the extent of the recent farmers’ protests across Europe and India is one forcing change. In the EU, with significant actions in Berlin, Paris, Madrid and Brussels, the EU Commission has been forced to concede that it must listen to farmer’s grievances about an overbearing, micro-managing Common Agricultural Policy, what they perceive as the imposition of unrealistic and unfair emissions controls in the dairy and beef sectors, and, in common with rioting Indian farmers, the deep frustration with what the industry regards as unfair competition from “abroad”, not only to do with prices but overseas competitors not being held to the same husbandry standards (and therefore having lower costs). With little formal political coordination in evidence, to what extent this becomes a major factor in the June European Parliament elections and the Indian elections in May/June is debatable. But it is a powerful reminder to the political class (and in the EU, the Commission which is the EU’s civil service) that the more they distance themselves from the electorate, the greater the chance of a reaction.

The political backdrop is made much more complex today thanks to the rapid development and all-pervasive presence of muti-media forums and social media. Add to which the propensity for AI to be used subversively in the promotion of “fake news”, it can blur fact with fiction, truth with lies. Social media is undoubtedly a powerful and unstoppable force, but in the democracies, it is provenly a double-edged sword.

Investment perspective: reactive rather than pre-emptive 

There are many other factors which will determine the outcomes of elections: the economy; the cost-of-living crisis; climate change policy to name but three. But with half the world’s population going to the polls this year, including the UK and the US, and with all that is self-evident in the fragility of geopolitical events in Europe and the Middle East, the increasing polarisation and “populism” of politics is of direct relevance to investors. The perception of electorates thinking that they are irrelevant to politics is a real problem for democracies: being taken for granted or worse, taken for fools, invariably ends up producing reactions and consequences. Brexit was the obvious example in the UK; the cult of Trumpism and the up-ending of US politics in no more than two decades another. Political change can take policy off in unexpected directions to which investors and markets have to adjust.

As regards the Merlin portfolios, it is something we consider in the broader assessment of investment risk; however, what we do not tend to do is to take pre-emptive investment decisions (i.e. essentially place bets) ahead of events such as elections; our preferred option is to consider the potential outcomes and formulate a range of options and then consider the result and take the appropriate action.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.