Fisher Investments UK Reviews Political Gridlock

Political gridlock can be frustrating to many. In Fisher Investments UK review, squabbling over issues can be grating, especially when policymakers’ disagreements block legislation you may see as beneficial (whether for sociological, economic or other reasons). Yet we think equities see this differently: gridlock is beneficial, despite the understandable frustration it can cause.

Political gridlock is the phenomenon Fisher Investments UK has observed of government divisions (e.g., party versus party, ideological or intraparty) leading to little legislation passing. It often comes with lots of political posturing, arguing, finger-pointing and headline noise in financial publications Fisher Investments UK reviews regularly – which can be emotionally trying. Moreover, we think many people want politicians to do something to justify their vote – not simply argue without results.

However, we have found broad legislation can create winners and losers – for example, when government funding is redirected away from one initiative to support another, or when new taxes provide a windfall to one industry whilst being an added burden to those taxed. New regulations can create compliance costs and interfere with planned investments, too. In behavioral finance, the phenomenon known as myopic loss aversion, or prospect theory, shows people tend to hate losses more than twice as much as winners enjoy equivalent gains.[i] Hence, Fisher Investments UK thinks negative sentiment from those on big legislation’s losing end likely outweighs the positive sentiment from winners.

To us, rule changes – no matter how well-intentioned – can also create unintended consequences. For example, America’s Sarbanes-Oxley Act (which made US CEOs criminally liable for accounting irregularities at their firms, even if they were unaware of the issue), increased compliance costs for businesses and, in Fisher Investments UK’s review, extended 2000 – 2003’s global bear market.[ii] More recently, we think the UK’s household energy price caps – introduced in 2019 with the intention of protecting consumers against rising energy prices – prolonged the country’s 2021 – 2023 inflation (a period of broadly rising prices across the economy); first by acting as a price target for energy producers and later by preventing producers from passing along lower costs to consumers as energy prices fell.[iii] Whilst this wasn’t a big negative for equities overall, in our view, it did put some suppliers out of business.

Crucially, in Fisher Investments UK’s review, we have found big rule changes – and talk of them – can fan the fire of uncertainty for businesses. We think businesses have less incentive to plan and invest if they see sudden rule changes affecting property rights, taxes or regulations in a way that would threaten the profitability or feasibility of new investments. Based on our observations, firms may find it beneficial to wait and see how rules change before making longer-term business decisions. We think political gridlock mitigates this uncertainty by reducing big legislation and watering down bills that eventually pass – giving businesses more confidence in a new investment’s return potential. Hence, we think firms and investors have more incentive to plan and invest amidst gridlock – boosting equities.

In Fisher Investments UK’s review, recent history provides myriad examples of political gridlock delivering positive surprise – which we think partly underpinned equities’ rise. In Italy, for example, financial commentators and analysts we follow saw Giorgia Meloni’s Brothers of Italy as a threat to Italian equities if voted into power in 2022, due to the party’s anti-EU stance and rhetoric. Yet Italian equities rose soon after Italy’s general election in September 2022 – despite the Brothers of Italy’s strong election results and Meloni becoming Italy’s Prime Minister – and were up 42.9% in euros a year later, leading world and eurozone equities in euros.[iv] We think gridlock partly explains this, as equities saw Meloni’s multi-party coalition government – comprised of disparate interests and goals – preventing big legislation.

Meanwhile, in countries with no government for prolonged periods, we have found calamity doesn’t ensue for equities – in Fisher Investments UK’s review, legislative inaction keeps uncertainty low. The Netherlands went without a government for 225 days in 2017 – yet Dutch equities rose 9.8% in euros in that span, mirroring eurozone equities’ 10.6% rise.[v] Belgium didn’t form a government for a record 652 days between former Prime Minister Charles Michel’s December 2018 resignation and September 2020. Yet before their COVID-induced February 2020 drop, Belgian equities rose 22.5% in euros, basically paralleling eurozone equities’ 26.1% climb.[vi]

Whilst Fisher Investments UK doesn’t think gridlock was the sole factor driving the aforementioned equity returns, it is one key area that helped reality beat widespread negative forecasts, in our view. Upcoming elections can weigh on sentiment, in our experience, as headlines and analysts talk of new governments making big, negative changes. (We don’t think this is unique to any political party or point on the ideological spectrum.) We think surprises move equities most – hence, when gridlock blocks negative changes many see, positive surprise ensues and equities rise. In Fisher Investments UK review, this usually goes unnoticed, as political bickering takes centre stage – thus preventing gridlock being priced into equities. Yes, we have found political rhetoric and arguing can weigh on sentiment temporarily. We think investors benefit from tuning this out. As we have shown, gridlock delivering positive surprise can help boost equities higher, despite temporary wiggles.