A Look Ahead at Early June’s Major Elections

Editors’ Note: MarketMinder favors no political party nor any candidate anywhere. We assess developments for their economic and market impact only.

Memorial Day weekend is nearly upon us, bringing the unofficial launch of summer. It also brings us to June’s doorstep—the eve of some widely discussed international elections. What is coming up and what does it mean for markets? Let us dive in.

All Eyes on Mexico’s Presidency … but Don’t Forget the Legislature

Mexico is up first, voting for president and the whole legislature on June 2. All eyes are on the former, which pits the ruling Morena party’s Claudia Sheinbaum against Xóchitl Gálvez, who is standing for a coalition of three traditionally centrist parties. Sheinbaum consistently polls about 20 points ahead of Gálvez, making her the clear favorite.^[i]

But we wouldn’t presume this is a done deal. While Sheinbaum polls well personally, Morena comes a distant second to “independent” when people register their partisan preferences. A third candidate, Jorge Máynez from the center-left Citizen Movement, also complicates the picture somewhat. If some of his supporters opt for Gálvez at the last minute and undecided voters lean away from Morena, it could be a closer contest than polls indicate.

That said, if the polls are right and Sheinbaum wins, what then? Most commentary paints her as a continuity candidate who will extend the policies of the outgoing Andrés Manuel López Obrador (AMLO), a left-wing populist who pledged in 2018’s campaign to undo 2013’s energy reforms. That program, shepherded by former President Enrique Peña Nieto, stopped short of privatizing the industry—but it ended state-owned oil firm Pemex’s monopoly and opened the market to foreign and private competition. This, plus other pro-market reforms aimed at increasing participation in the formal economy, have borne much fruit.

So investors were touchy when AMLO won the presidency in 2018—which is seemingly standard whenever left-leaning politicians look poised to win office. But fears proved false. AMLO didn’t push forward with more pro-market reforms, but he didn’t reverse 2013’s legislation. Though he campaigned against NAFTA, his government oversaw the ratification and implementation of its successor, the US Mexico Canada Agreement.

Now the fears have transferred to Sheinbaum, who expresses support for AMLO’s energy policies. But whether she reverses reforms will hinge on a couple things. One, whether her actual policy agenda matches her campaign proposals. That isn’t certain, given her historical record of moderation and the need to play to AMLO on the campaign trail in order to maximize Morena supporters’ turnout. Political analysts surmise that the world really hasn’t seen her true priorities yet and they might not be so radical.

Two, no president can unilaterally overturn legislation. That is Congress’s purview, making the overlooked legislative elections crucial. Here, Morena’s polling lead is much narrower, and its total support is below 50%.^[ii] With a large chunk of voters still undecided—and both houses having a mix of proportional and direct representation—winning a majority could be difficult. Even if it does, the 2013 energy reforms were a constitutional amendment. Hence, changing them would require a two-thirds vote in Congress and state-level approval. That isn’t impossible, but it is a tall order if Morena doesn’t have a thumping majority.

So we see plenty of room for uncertainty to fall and reality to beat expectations, especially if Congress is gridlocked. As clarity arrives and investors see economic progress continuing, small tailwinds seem likely.

European Parliament Elections Pack Little Punch

The European Parliament will then take the stage, holding elections from June 6 – 9. As is usual for Europe these days, there is a lot of talk about “far-right” populists gaining ground, causing a lot of angst among the traditional centrist parties. Most of it is sociological, outside markets’ purview. But there are rumblings that a large enough populist presence could upend economic policies like the Green Deal—a large package of subsidies and targets for renewable energy. There is also talk that a strong showing could be a foretaste of greater populist influence at the national level.

We suggest not getting hung up on any of it. European Parliament (EP) elections are often a protest vote. Citizens, frustrated with the mainstream parties’ governance in their home countries, will vote for smaller parties on both ends of the ideological spectrum to send a message.

The extent of this remains to be seen—and could be changing now. In Germany, the AfD was expelled by the broader far-right European group it runs with in EP elections just Thursday morning—a bit of an October surprise in late May.

Then, too, it all amounts to noise within the European Parliament itself. Smaller parties stir debate, but the main centrist groups typically form a unity government and drive the agenda. Polls indicate this won’t change, which means the Green Deal and other items—whether you think they are wonderful for stocks or misdirect investment—probably stay intact. Perhaps with some small tweaks, but we doubt this changes much. 

Meanwhile, in Belgium

Belgium will pair its national election with the EU contest, heading to the polls on June 9. Here, the central issue on the world’s mind isn’t economic policy, but whether a Flemish separatist party wins enough clout to accomplish its goal of seceding within five years.

The divide here is similar to the divisions in Spain, where there are linguistic and economic rifts between Catalonia and the rest of the country. Underlying much of the Catalan separatist movement is the long-running frustration over tax revenue going to other, poorer regions of the country. In practice, it means Barcelona effectively subsidizes much of the rest. In Belgium, this plays out in the divide between the Dutch-speaking and comparatively richer Flanders, and the French-speaking, less wealthy Wallonia.

These two halves of the country have never really seen eye to eye, underpinning Belgium’s chronic, deep gridlock—and its long stretches with no government. But now a separatist party, Vlaams Belang, is gaining traction in Flanders with its charismatic leader, Tom Van Grieken. Polls indicate Vlaams Belang could win the most seats next month, making some investors nervous that an independence campaign could distract markets.

We think these concerns are overstated. While Vlaams Belang could win the most seats, it looks nowhere close to a majority. Instead, it looks like a recipe for another marathon government formation process. By peeling votes from the traditional centrist parties, Vlaams Belang probably makes it harder for these groups to form a coalition without appealing to smaller parties on the left or the right. Such agreements are notoriously difficult to ink, as the Netherlands has demonstrated since November. They also tend to result in watered-down agendas and very little happening.

For stocks, this is fine. It extends a status quo markets and businesses know well and keeps legislative risk low. This enables businesses to keep planning and investing, making the economy and markets hum while politicians bicker in the background.