So far this year, the US equity market has not been affected significantly by the high level of domestic political discord. The volatility we have seen in US equities appears to have been driven largely by concerns about rising interest rates and external factors such as trade war fears. US stocks now are about where they started the year, with the SPDR S&P 500 ETF up 1%.
Similarly, the United Kingdom is struggling with how to proceed with exiting the European Union (“BREXIT”). The question of whether to seek to remain in the customs union is not only an extremely difficult crunch item in negotiations with Brussels, it is dividing the country and even dividing the ruling Conservative Party and its cabinet. That government, headed by Prime Minister May, is barely hanging on. Should the Labor Party come to lead the country, its policies would surely be unfriendly to markets. Yet UK equities have not unduly suffered. The iShares MSCI United Kingdom ETF, EWU, remains up 2.32% year-to-date.
Likewise, across the Channel the popular Macron government in France is facing railroad and airline strikes and numerous demonstrations in opposition to the substantial and much-needed economic reforms that Macron is pressing ahead with in sensitive areas such as labor and pensions. Yet the French equity market continues to outperform. The iShares MSCI France ETF, EWQ, is up 4.1% year-to-date.
In this note we take a closer look at Japan, where the equity market has also so far weathered some very dramatic domestic political storms. Prime Minister Shinzo Abe, who had been riding on high ratings in the polls while pursuing with some sensitive reforms, encountered serious problems when a private school, Moritomo Gakuen, which has a nationalist curriculum, acquired land for a new school from the national government at an 89% discount to its appraised value. First Lady Akie Abe is friends with the wife of the school's chairman. Opposition politicians charged undue political influence, and the scandal worsened as altered government documents came to light, a Ministry of finance official who did the altering committed suicide and other documents went missing. Prime Minister Abe is also accused of using his influence to support another school's application to open a veterinary school.
