The Viewpoint: A step to the right – what recent political shifts mean for investors

Just a year after Keir Starmer’s historic win, Britain’s political landscape has fractured. Labour faces internal strife, Reform UK surges in the polls, and betting markets now favour Nigel Farage as the next Prime Minister, an outcome that would have seemed implausible just 12 months ago.

The last few years have brought a pronounced rightward shift in electoral outcomes across Europe, the Americas, and parts of Asia. Voters expressed growing discontent with establishment politics, immigration policies, and the perceived costs of green transitions. In the European Union, far-right and nationalist parties made significant gains in the European parliament elections, particularly in France and Germany where economic stagnation and migration anxieties eroded support for centrist governments. Even traditionally liberal democracies like the Netherlands and Sweden saw conservative and nationalist rhetoric gain traction.

Across the Atlantic, the United States endured a bitter presidential campaign dominated by debates over national identity, border control, and economic insecurity. Argentina’s Javier Milei, a self-described “anarcho-capitalist,” assumed the presidency in late 2023 and began implementing sweeping reforms in 2024, including subsidy cuts and economic deregulation.

In India, Prime Minister Modi’s BJP party retained power in the 2024 general elections. The BJP’s blend of Hindu nationalism and economic liberalisation reflects the growing appeal of culturally assertive, market-friendly policies.

While some countries held the political centre, the broader trend revealed a deepening scepticism of globalism, elite institutions, and progressive agendas, particularly where these were perceived to impose costs on ‘ordinary citizens’.

To my mind, several factors underpin this movement. First, economic discontent probably plays the most significant part. Inflation, stagnant wages, and declining purchasing power, especially among lower and middle-income groups, have fuelled voter frustration. Post-pandemic recovery has been uneven: while corporate profits and stock markets rebounded, households experienced little relief. Populist leaders have exploited this disconnect, pledging to “take back control” from technocratic elites.

A growing segment of the population, particularly young men, has become disenchanted with liberal institutions and progressive norms. Online influencers on platforms like YouTube and TikTok speak directly to male audiences about masculinity, autonomy, and economic frustration. Politicians like Milei in Argentina and Wilders in the Netherlands have tapped into this cultural rebellion as much as economic discontent. This demographic is emerging as a swing group in many countries.

This is not the idealism of previous generations, but a more cynical, anti-establishment stance – often libertarian, nationalist, or culturally conservative.

Job market precarity, alienation from traditional parties, and a desire for ideological clarity have driven support for radical change. This is not the idealism of previous generations, but a more cynical, anti-establishment stance – often libertarian, nationalist, or culturally conservative. While diverse, data from multiple recent elections suggests that movements offering economic freedom, strong national identity, and scepticism of liberal elites are gaining traction.

So what, if anything does this mean for equity investors?

The resurgence of the political right introduces new volatility into global markets. For investors, the challenge lies not only in evaluating policy shifts but in understanding the deeper social currents reshaping the political landscape.

This is often challenging, as right-wing populist governments can be known to pursue inconsistent agendas. While commonly perceived as pro-business, they can offer a sometimes-confusing mix of deregulatory policies alongside protectionist measures. Meanwhile, promises to cut taxes often sit alongside spending measures to appease disenfranchised voters. It can therefore be hard to predict what the economic consequences of these parties will be. They also introduce geopolitical risks, such as trade barriers, institutional instability and unpredictable foreign policy.

Equity investors tend to assign higher risk premiums in these circumstances, especially for firms with cross-border exposure.

Brazil is a good example. Under its previous president, Jair Bolsonaro, institutional conflicts and erratic policymaking led to a decline in corporate confidence, despite initial optimism about pro-business reforms. This inconsistency between populist rhetoric and actual governance often results in unpredictable regulatory environments, making long-term business planning difficult. Equity investors tend to assign higher risk premiums in these circumstances, especially for firms with cross-border exposure.

An academic study earlier this year, which analysed over 36,000 firms across 42 countries found that populist governments tend to reduce corporate investment due to heightened political uncertainty and transaction costs. Certain institutional arrangements, such as proportional electoral systems and independent courts, can lessen the negative impact of populism on corporate investment. But in general, the longer a populist government is in place, the weaker these checks and balances become. [1]

So which sectors are most affected? A renewed focus on domestic infrastructure, supply chain reshoring, and support for national champions may benefit sectors like construction, energy, aerospace, and semiconductors. The rise in global instability in recent years has contributed to increased defence spending across NATO, which has driven a multi-year bull run in arms manufacturers.

The political right’s growing scepticism toward sustainable investing – particularly in the United States – has already begun to reshape capital flows. Anti-ESG legislation and rhetoric have slowed momentum in sustainable finance, leading to a derating of ESG-sensitive stocks and a repricing of expectations around climate-related disclosures and fiduciary mandates. This shift has created headwinds for sectors reliant on green subsidies or regulatory support, such as renewables and electric vehicles.

Traditional energy sectors, especially oil and gas, have experienced a resurgence in investor interest.

Conversely, traditional energy sectors, especially oil and gas, have experienced a resurgence in investor interest. Right-leaning governments tend to favour energy independence and reduced reliance on international climate agreements, which often translates into support for domestic fossil fuel production. In some cases, this has led to the rollback of environmental regulations and the revival of previously shelved projects. As a result, energy-related equities could benefit from both policy tailwinds and rising geopolitical risk premiums.

Our colleagues on the emerging markets debt desk know all too well how political instability and aggressive policy experimentation can also unsettle bond markets. In several emerging economies, sovereign spreads widened in 2024 amid concerns over institutional independence and fiscal discipline. Investors should monitor currency and sovereign risk closely, particularly where populism intersects with weak democratic norms.

As political risk becomes a structural feature of developed markets, investors must evolve their frameworks. Understanding not just policy, but the cultural and institutional undercurrents driving political change, will be key to navigating the next decade.

References:

[1] https://link.springer.com/article/10.1057/s41267-024-00769-5

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.