Business Maverick

ROAD TO 2024 ELECTIONS

Are elections big market movers? The experts have the numbers, and some advice for investors

Are elections big market movers? The experts have the numbers, and some advice for investors

History shows there is little correlation between elections and market performance.

The year 2024 is the year of elections in at least 64 countries and South Africa takes its turn this week, with nearly 28 million voters heading for the polls on 29 May.

For the first time since South Africa’s first democratic elections in 1994, the outcome is not predictable. This election uncertainty can easily cause investors to make rash decisions in reaction to the current climate and perceived market swings. However, the investment experts are all in agreement. Regardless of the political environment, they recommend holding your investment course for the long term.

Marise Bester, investment specialist at Allan Gray, acknowledges that there is “above-average” political risk this year, but she adds that it is a true reflection of a healthy democracy.

Sangeeth Sewnath, deputy managing director at Ninety One, points out that a review of history shows little correlation between elections and market performance.

“The evidence supports the theory that markets perform better after elections given the risk aversion beforehand,” he says.

What history tells us

Looking at the performance of the FTSE/JSE All-Share Index (ALSI) over the past 30 years, there have only been five years in which the index reported a negative return (1997, 1998, 2002, 2008 and 2018).

“None of these years coincided with a general election,” Bester says.

“Markets are cyclical, and short-term volatility, which is an inherent feature of achieving real returns, also leads to fluctuating returns with no clear pattern, even during repeat events such as election years.”

However, she concedes that this is not a typical election cycle. “The outcome of the May election could drastically change many policies that could affect companies in different ways,” she states. “But the same was true in 1994 and the ALSI achieved a return of 23% that year.”

Despite the market shocks and rebounds, local equities have grown by 13% a year over the past three decades, underscoring the importance of focusing on the bigger picture. Bester adds that, although short-term fluctuations are likely to occur around the election, history suggests that the long-term trajectory of the market is driven by broader economic factors and company fundamentals.

“Investors are renowned for loathing uncertainty, which is why negative political news flow may upset markets as they attempt to discern what this risk means for asset prices. While uncertainty around election outcomes and potential policy changes can lead to increased market fluctuations, we analysed historical returns to determine if elections really are the market movers that people believe them to be,” Sewnath says.

Looking at South Africa specifically, Ninety One compiled equity market returns and bond market returns for the election years from 1966 to 2019. In 14 election years, only two years were negative for equities and four were negative for bonds. Sewnath says this suggests that elections may create noise and uncertainty but may not, in fact, be significant market movers.

What you can do as an investor

Kingsley Williams, chief investment officer of Satrix, advocates the following:

Resist the urge to act: Just as the driver who constantly changes lanes in an attempt to beat traffic often ends up stuck, hasty investment moves can derail your investment performance.

Avoid chasing past winners: Past performance is no guarantee of future return.

Don’t be too defensive: The biggest risk to growing long-term wealth is not taking any risk at all.

“Investors who combine strategies with payoff structures that are not too highly correlated, and add time for compounding to work its magic, are stacking the odds firmly in their favour over the longer term,” he says.

Defensive fund strategies

Williams says that if you want more defensive fund strategies because you are concerned about short-term volatility, you could consider investing in money market funds, bond index funds or exchange-traded funds (ETFs), low equity balanced index funds or low volatility equity ETFs.

Focus on what you can control

Investors should focus on what is within their control, contends Bester. “What we can control is how we react both in the run-up to and after the election, although keeping emotions in check is easier said than done,” she says. “This has been illustrated over time by investors switching out of equities into cash during times of uncertainty, often locking in losses.”

She adds that knowing that emotions can get the better of you may make the option of investing in a diversified, multi-asset-class fund, such as a balanced fund, more attractive.

“Balanced funds can have exposure to a range of different asset classes including offshore assets, locally listed companies that operate globally, attractively valued South African shares, high-yielding cash and bonds, as well as precious metals,” she explains. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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