Voting Finance – Portfolio Politics, and Why Investors Should Ignore Elections

Article written by InvestNow

It must be election year in NZ: Winston Peters is back at the top of the news.

But regardless of the Peters’ show, the Jacinda Ardern-led Labour Party is odds-on to win in a landslide come September 19 – albeit with enough uncertainty and scandal in the air to keep pundits in business.

Will the Greens survive? Can Judith Collins rescue National? And Winston….

For investors, though, the election itself could be something of a non-event if history is any guide.

Close-run elections tend to generate some market volatility

According to a 2006 Auckland University of Technology (AUT) study, elections – especially close-run elections – tend to generate some market volatility in the preceding months and in the immediate aftermath (an effect magnified if the result is a ‘surprise’).

The AUT analysis of 134 elections held across 27 countries concludes that investors betting on voting outcomes need a strong stomach.

“It turns out that the premium offered for the election risk is rather modest and acceptable only for investors with a relatively low degree of risk aversion. All other investors will attain higher expected utility by diversifying their portfolio internationally,” the study says. “Furthermore, we show that national elections can be considered as important events by the participants of option markets. In the heat of political changes, options tend to trade at higher implied volatilities.”

Other than providing a wisp of information for those gambling in the options markets, then, the September NZ election day probably won’t flash much of a buy or sell signal to long-term investors.

However, the ultimate make-up of the NZ government could have some sway on market returns over the following three years, another Waikato University report suggests.

For a few bips more

A 2010 Waikato University study found that “there is no significant difference in market returns between both National and Labour during their respective terms in office”.

“The findings of this study conclude that there is no evidence of an election effect in the New Zealand stock market, but that a political cycle exists,” the report says. “Nominal returns on the market index are found to be 0.048% higher when the National party is in government compared to when the Labour party is in government.”

Even if the effect still holds some 10 years after the Waikato University analysis, it doesn’t provide much of an incentive to vote National: a possible extra return of less than 5 basis points (known colloquially as ‘bips’) on NZ equities is neither here nor there for diversified portfolio investors.

More importantly, professional investors will be weighing up the potential impact on the NZ economy (and the spin-off effect on markets as well as individual companies) of any new policy announcements in the run-up to the September ballot, along with the likelihood of any particular party holding, or influencing, power post-September 19.

Given the dearth of actual policy releases, NZ investors are still in the dark about what any election result could mean for markets.

Furthermore, the country effectively remains in emergency financing mode, held up by record government borrowing and off-the-charts central bank largesse.

While NZ may have escaped the worst of COVID-19 health-wise, the country’s fate remains linked to how the global economy plays out as the pandemic rolls on.

Domestic tax-and-spending policies that drive many NZ investment decisions in typical election years could well be drowned out by the international noise.

Stay boring: don’t listen to the jokers

And much of the racket will be transmitted via another election due later this year that promises to keep the world, and markets, on edge.

On November 3, the US goes to the ballot box in one of the most intriguing presidential election battles of all time. The shock 2016 winner, Donald Trump, currently lags Democrat rival, Joe Biden in the polls as the country staggers through an apparently out-of-control coronavirus infection.

Nonetheless, the US stock market, as in the rest of the world, has recovered to previous highs following the late March plummet at peak COVID-19 panic.

The state of the domestic shares is probably more important in US elections than in any other jurisdiction, an obsession that has likely created some self-fulfilling cycles as presidents prop up equities with market-friendly policies in election year.

In fact, many US analysts hold to the ‘presidential election theory’ that seeks to codify the political patterns into investable ideas such as ‘strong share markets favour the incumbent’, or ‘equities return more in a president’s third year of office’, or ‘a Republican win is good for business’.

Writing in a recent blog, Irfan Chaudhry, a US portfolio manager, debunks some of these rules-of-thumb.

“Since 1990, a Democratic win has been slightly better for the stock market at 9% annualized, compared with an average of 6% annualized during Republican presidencies,” Chaudhry says. “Therefore, which party wins the election does not seem to have any tangible effect on the stock market.”

Chaudhry notes that using ephemeral data linking politics with portfolios “is not an advisable way to make investment decisions”.

“It sounds exciting, and it fulfils a belief that many people have that there’s a way to beat the market,” he says. “However, there are a lot of external factors which may affect market performance. It may be safer to invest in a more boring but systematic way, based on understanding the risk and return of investing and how it correlates to your situation and objectives.”

NZ investors should probably follow suit as our election looms, even with wild-card Winston still in the pack.

Voting Finance – Portfolio Politics, and Why Investors Should Ignore Elections

Article written by InvestNow

It must be election year in NZ: Winston Peters is back at the top of the news.

But regardless of the Peters’ show, the Jacinda Ardern-led Labour Party is odds-on to win in a landslide come September 19 – albeit with enough uncertainty and scandal in the air to keep pundits in business.

Will the Greens survive? Can Judith Collins rescue National? And Winston….

For investors, though, the election itself could be something of a non-event if history is any guide.

Close-run elections tend to generate some market volatility

According to a 2006 Auckland University of Technology (AUT) study, elections – especially close-run elections – tend to generate some market volatility in the preceding months and in the immediate aftermath (an effect magnified if the result is a ‘surprise’).

The AUT analysis of 134 elections held across 27 countries concludes that investors betting on voting outcomes need a strong stomach.

“It turns out that the premium offered for the election risk is rather modest and acceptable only for investors with a relatively low degree of risk aversion. All other investors will attain higher expected utility by diversifying their portfolio internationally,” the study says. “Furthermore, we show that national elections can be considered as important events by the participants of option markets. In the heat of political changes, options tend to trade at higher implied volatilities.”

Other than providing a wisp of information for those gambling in the options markets, then, the September NZ election day probably won’t flash much of a buy or sell signal to long-term investors.

However, the ultimate make-up of the NZ government could have some sway on market returns over the following three years, another Waikato University report suggests.

For a few bips more

A 2010 Waikato University study found that “there is no significant difference in market returns between both National and Labour during their respective terms in office”.

“The findings of this study conclude that there is no evidence of an election effect in the New Zealand stock market, but that a political cycle exists,” the report says. “Nominal returns on the market index are found to be 0.048% higher when the National party is in government compared to when the Labour party is in government.”

Even if the effect still holds some 10 years after the Waikato University analysis, it doesn’t provide much of an incentive to vote National: a possible extra return of less than 5 basis points (known colloquially as ‘bips’) on NZ equities is neither here nor there for diversified portfolio investors.

More importantly, professional investors will be weighing up the potential impact on the NZ economy (and the spin-off effect on markets as well as individual companies) of any new policy announcements in the run-up to the September ballot, along with the likelihood of any particular party holding, or influencing, power post-September 19.

Given the dearth of actual policy releases, NZ investors are still in the dark about what any election result could mean for markets.

Furthermore, the country effectively remains in emergency financing mode, held up by record government borrowing and off-the-charts central bank largesse.

While NZ may have escaped the worst of COVID-19 health-wise, the country’s fate remains linked to how the global economy plays out as the pandemic rolls on.

Domestic tax-and-spending policies that drive many NZ investment decisions in typical election years could well be drowned out by the international noise.

Stay boring: don’t listen to the jokers

And much of the racket will be transmitted via another election due later this year that promises to keep the world, and markets, on edge.

On November 3, the US goes to the ballot box in one of the most intriguing presidential election battles of all time. The shock 2016 winner, Donald Trump, currently lags Democrat rival, Joe Biden in the polls as the country staggers through an apparently out-of-control coronavirus infection.

Nonetheless, the US stock market, as in the rest of the world, has recovered to previous highs following the late March plummet at peak COVID-19 panic.

The state of the domestic shares is probably more important in US elections than in any other jurisdiction, an obsession that has likely created some self-fulfilling cycles as presidents prop up equities with market-friendly policies in election year.

In fact, many US analysts hold to the ‘presidential election theory’ that seeks to codify the political patterns into investable ideas such as ‘strong share markets favour the incumbent’, or ‘equities return more in a president’s third year of office’, or ‘a Republican win is good for business’.

Writing in a recent blog, Irfan Chaudhry, a US portfolio manager, debunks some of these rules-of-thumb.

“Since 1990, a Democratic win has been slightly better for the stock market at 9% annualized, compared with an average of 6% annualized during Republican presidencies,” Chaudhry says. “Therefore, which party wins the election does not seem to have any tangible effect on the stock market.”

Chaudhry notes that using ephemeral data linking politics with portfolios “is not an advisable way to make investment decisions”.

“It sounds exciting, and it fulfils a belief that many people have that there’s a way to beat the market,” he says. “However, there are a lot of external factors which may affect market performance. It may be safer to invest in a more boring but systematic way, based on understanding the risk and return of investing and how it correlates to your situation and objectives.”

NZ investors should probably follow suit as our election looms, even with wild-card Winston still in the pack.

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