Fisher Investments Australia® Reviews the Unsung Benefits of Gridlock – Fisher Investments Australia®

In Fisher Investments Australia’s experience, voters aren’t fans of do-little politicians—true whether in Canberra or Washington, DC. It is understandable: People want their vote to matter. But, perhaps counterintuitively, a lack of legislative action needn’t trip up markets. In most developed economies, we have found gridlock is actually bullish. Let’s explore why political gridlock doesn’t hinder stocks and often actually helps them.

In our experience, many think stocks benefit (and suffer) under certain policies and laws. A popular example: Stocks prefer tax cuts and shudder at the thought of tax hikes. Or that markets enjoy “deregulation” and hate tighter rules. However, reality is more complex, as Fisher Investments Australia will review. Legislative changes create winners and losers, often in unintended ways.

Consider, if a government tightens accounting rules or other measures involved with equity listing, it could hurt investment banks and stock exchanges whilst benefiting private equity. That could increase executives’ risk aversion, hitting investment and expansion plans. Or take restricting oil and gas drilling permits. Multinationals with diversified revenue streams can likely mitigate a country-specific loss in future production by shifting activity. Smaller, single-country or regional oil producers may have a tougher time. These government changes would have ended up hurting smaller operators but not bigger businesses—likely not the policy’s goal. Moreover, a government that can enact changes easily increases uncertainty. Why? Businesses have to make long-term plans. That is hard in any environment, but when legislation shifts the rules, it could squander capital—reducing firms’ willingness to take risk.

This is why Fisher Investments Australia thinks political gridlock is a generally underappreciated bullish force for markets. Government inaction can manifest in myriad ways, from a minority government or fractious coalition to a split legislature or even a single-party government fragmented by intraparty divides. However it looks, the lack of unity forces politicians to compromise and water down policy ideas—or even abandon untenable proposals outright. The gridlock tends to make it more difficult to enact sweeping legislation.

Now, gridlock isn’t always and everywhere a positive. Some nations, mostly less-developed Emerging Markets, may benefit from economic or structural reforms aimed at opening the economy to market forces. In some cases, Fisher Investments Australia finds nations employing policies like strict price caps, inflexible labour laws or other barriers to market forces and competition. These laws are deeply entrenched, and reforming them takes a lot of political capital. Gridlock decreases that. But it is less of an outright market negative and more the absence of a long-term positive.

That said, most developed nations—e.g., Australia, the US, most Western European nations—have competitive economies, are open to market forces and feature a strong rule of law. Reform is largely unnecessary, in Fisher Investments Australia’s review, and can easily amount to a net negative. Behavioural finance research completed by Nobel laureates Daniel Kahneman and Amos Tversky shows people dislike losing over twice as much as they appreciate an equivalent gain. Hence, when governments pick winners and losers, the pain of loss associated with legislative shifts often outweighs potential gain. Gridlock decreases the likelihood that sweeping legislative changes become reality. In our opinion, businesses prefer this kind of political environment. The decreased probability of change allows businesses to plan and take the risk of spending capital and investing.

Fisher Investments Australia thinks investors can use this knowledge to help inform portfolio decisions. Say an election is coming up. In our experience, headlines tend to focus on what politicians say and how they say it, i.e., their personalities. But stocks care less about what politicians pledge on the campaign trail and more about what they can (or can’t) actually do once in office. The legislature’s composition influences that calculus. Some questions to consider: What kind of control does the party with the most seats have? If the party has a plurality, will it work with others to lead either a coalition or minority government? Either way, gridlock is likely in this scenario.

Or, if one party wins an outright majority, how large is this buffer? Narrow control of the legislature could suggest some gridlock exists, especially if intraparty divisions are deep. But if the winner sweeps into a power with a resounding majority, Fisher Investments Australia thinks the risk of major legislative change rises—and that can create uncertainty. Moreover, if the consensus views the winner as “pro-business,” a big electoral victory may set expectations high for supposedly economically beneficial policies. Any failure to deliver on promises and meet the hype could set up disappointment that weighs on market returns.