NEW YORK (TheStreet) -- While heated economic debate rages on over appropriate financial action (the decision to adopt a model of austerity, or one of stimulus to remediate our economy), voters around the world are overwhelmingly favoring the latter as a viable option.Many domestic investors closely follow the healthcare and financial reform debate, trying to derive financial winners and losers from new legislation. Even though the drilling ban was overturned by a federal judge, the government's response to the disaster in the Gulf of Mexico may yet have investment implications. And who can forget the bailout of the banks and automakers, along with Fannie Mae ( FNMA) and Freddie Mac ( FMCC)? While investors focus on these sector-specific issues, they often ignore the impact of broader political trends because, most of the time, they simply don't matter. Whether right or left, most governments in the developed world have been fairly centrist over the past three decades. But today is a different story. Governments are more involved in the economy due to bailouts and emergency financial and monetary policies. Voters are more active, as well as willing to punish politicians who fail to live up to their promises or act against popular will. In all likelihood, current political trends will grow stronger as time passes and the winners in recent or upcoming elections will have a much greater impact on public policy. Usually, an election results in slight changes to policy, but with one side advocating new stimulus programs to forestall a depression (while the other side claims that these plans will lead to an even greater crisis) the policy outcomes are likely to be quite different. In the U.S., there have already been incumbent losses in both the Republican and Democrat primaries due to voter dissatisfaction. The overwhelming theme is spending and deficits; Congress did not pass a budget for 2010 in order to spare members from having to vote for a budget with a huge deficit. Otherwise-popular extensions of unemployment benefits have also been defeated over deficit concerns. For investors worried about U.S. deficits or concerned about deflation, this is positive news for bond prices and ETFs such as iShares Barclays 20+ Year Treasury ( TLT).
However, the U.S. isn't alone in political volatility. In the United Kingdom, the Labour party's 13-year reign ended as voters gave the Conservative and Liberal parties a shot at management with a coalition government. In the weeks leading up to the election, the British pound had been sliding relative to the U.S. dollar as investors wondered whether Britain would have debt problems similar to Greece. In the wake of the election and the possibility of budget cuts, the pound later rallied. Although it fell again with broader markets as the U.S. dollar rallied in May, CurrencyShares British Pound ( FXB) bottomed on May 18, about three weeks ahead of the euro. Since May 7, the day after the elections, FXB has outperformed CurrencyShares Euro Trust ( FXE) by about 2%, although iShares MSCI United Kingdom ( EWU) has trailed iShares MSCI EMU Index ( EZU) by roughly 4%. Another country that recently held elections is Germany. Chancellor Angela Merkel saw her party defeated in regional elections in May, in part due to voter anger over national participation in the Greek bailout. Merkel later faced a rebuke by her coalition partners at the end of June, when her choice for president failed to win election in the first two rounds of voting. German elected officials vote for the president by secret ballot and Merkel's coalition had the votes to achieve victory in the first round of voting. However, coalition partners wanted to send her a message and withheld their votes until the third and final round of voting. Although Germany has not shifted policy, it has nonetheless become more forceful, with Merkel rebuking Obama's pleas for more deficit spending. Merkel's government is also pushing ahead with a framework to allow sovereign defaults in Europe, parts of which include investors taking losses and bankrupt governments losing some sovereign control over their budget. iShares MSCI Germany ( EWG) has been one of the better performing eurozone ETFs and, were it not for the devaluation of the euro, it would have outperformed the SPDR S&P 500 ( SPY) (SPY). Germany is very well positioned for a world of austerity and a relatively weak euro. Meanwhile, Australia and Japan are both characterized by stunning political changes, but with less clear investment implications. Down under, the Prime Minister Kevin Rudd's government proposed a Resource Super Profits Tax on May 2. The timing couldn't have been worse, as concerns about Chinese growth and a strong U.S. dollar (or weak euro) combined to hammer commodity prices. The tax proved extremely unpopular with voters as well, and with his poll numbers already in red zone, the Labor government told him in mid-June that he had two weeks to fix the tax.
Two weeks later, Rudd resigned and was replaced by Julia Gillard. She fixed the tax and plans to call elections soon, as Labor enjoyed a bounce in the polls following the change in leadership, but this lead is eroding. iShares MSCI Australia ( EWA) and CurrencyShares Australian Dollar ( FXA) may be affected as we get closer to an election date, but for now, polls indicate a negligible change in government. In Japan, the Liberal Democratic Party (LDP) saw its nearly uninterrupted rule since the mid 1950s come to an end last year. Yukio Hatoyama led the Democratic Party of Japan (DPJ) to victory and became the prime minister in Sept. 2009, but resigned in June after his poll numbers plunged. He also failed to deliver on a promise to move a U.S. military base in Okinawa. Naoto Kan replaced him and suffered his own defeat this past weekend. The DPJ hoped to win 60 seats in Upper House elections, but only managed 44 after voters disapproved of a plan to double the consumption tax from five to ten percent. The LDP captured 51 seats while an upstart political party, the Your Party, captured 10 seats. The Your Party advocates cutting government spending before raising taxes, and is a milder version of the U.S. tea parties. In the wake of the election, the yen weakened, but it reversed course and was heading higher by the end of the trading day in the United States. Since Japan suffers from deflation, many political parties favor policies to generate inflation, including the DPJ and the Your Party, and there's room for cooperation. A weaker yen would mean WisdomTree Japan Hedged Equity ( DXJ) would outperform iShares MSCI Japan ( EWJ), but investors playing Japan may want to wait and see the politics play out. In any event, the shift in political fortunes suggests that Japan is also leaning towards austerity. At the time of publication, Dion Money Management owned EWJ.
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