Politics Persists as Investment Hot Topic

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Politics Persists

David Morse, CFA

David Morse, CFA - Managing Director of Global Credit Strategies & Head of Credit Research

Election uncertainty in Europe and political wrangling in the United States keep investors on alert, while market reaction to central bank activity was relatively muted.

Macroeconomic Backdrop for Credit:

While most people are taught that politics is one of the three topics you should never discuss in public (money and religion being the other two), these days politics are difficult for investors to ignore. In Europe, market participants had been concerned that a recent rise in populist momentum would put the long-term viability of the European Union in question. As a result, investors were paying very close attention to the election results in the Netherlands and took comfort in the fact that the Dutch right-wing populist party, the Party for Freedom (or PVV), had a weaker than expected showing. Perhaps more importantly, most indications out of France throughout the month suggested that market friendly centrist candidate Emmanuel Macron will likely defeat far-right populist candidate Marine Le Pen in the French presidential elections on April 23rd and May 7th. This gave investors comfort that France would not follow in the footsteps of the United Kingdom which triggered Article 50 in March, officially starting the clock on a two year negotiation process to leave the European Union.

Politics was also the focus in the United States as investors closely watched the House Republican’s attempt to repeal and replace Obamacare given its implications for the possibility for widespread corporate tax reform. Despite a majority in the House, Republican leaders could not get its bill (the American Health Care Act) to a vote, largely due to the opposition from an increasingly influential group of the ultra-conservative Republicans called the Freedom Caucus. This was concerning to the market for three reasons. First, it highlighted the various factions within the Republican Party, and questioned Trump’s abilities as a deal maker. Second, it eliminated approximately $1 trillion in savings which could have been applied to make corporate tax reform revenue neutral. Finally, it implied that corporate tax reform would be delayed. While the first two concerns are legitimate, the third is debatable. Although it is true that tax legislation could not start before the healthcare bill had finished, it does not necessarily mean it has to go in that order now that the healthcare bill has been tabled. The original sequence had more to do with the procedural process related to budget resolution rules than any fiscal considerations. Therefore, now that the health care bill is off the table, the timeline for corporate tax reform may actually be accelerated, but the end result may be a watered-down version of the original proposal.

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