Post Views: 486 In every economy of note around the globe, it has long been established that the political mood of the country has effect on its finan...
In every economy of note around the globe, it has long been established that the political mood of the country has effect on its financial markets as investors. This is particularly true of a pre-election year when foreign portfolio managers stay as close to cash as possible, depending on their own perception of where the votes may swing in the Presidential ballot.
Pre-election year is that immediately before the election. For example, Nigeria’s next general elections holds early February 2019, which means, 2018 is the year before it, for this purpose of this piece.
The reading of the a nation’s electoral cycle and how investors perceive whether there could be a change in leadership, is a major factor that results in much of the uncertainty pre-election years have been known for. This, it is believed can, and does spike market volatility and businesses, especially when it is seen that a new party may take power.
In such cases, portfolio investors begin to reduce their risk and exposures, at least until they are able to gauge precisely where the new government would tilt, which can take some time in the early stage of that administration.
In the United States, with a long history of democracy, a link has long been established showing that the pre- and post-election periods typically have opposite effects on investors’ optimism.
Research has also established a theory called the “presidential election cycle theory,” which states that the financial markets exhibit weakening trends in the year following a presidential election, just as a UBS report concluded that the S&P 500 moves from high to low and returns to high again for one complete cycle.
Markets have been known also to react positively to a more business-friendly party, just as there is more market volatility because of the uncertainty of who will be elected than when the outcome is fairly certain, according to a report from Merrill Lynch.
It has also been established that the U.S pre-election activities affect international markets, interest rates and currency markets, among others.
Back home, the trend is catching up as the Nigerian stock market becomes more and more internationalized, unlike up to a decade ago, when the mantra was that the bourse was most often oblivious to what happens in the domestic and external environments.
Before we go further, let us see what the case has been here since 1998 when Nigeria had its first pre-election year preparatory to its return to democracy governance for the fourth time after independence in 1960.
Beginning from 1999, the country was governed by the Peoples Democratic Party (PDP) until the 2015 election when the All Progressives Congress (APC), a fusion of political parties was elected, with its candidate Muhammadu Buhari as president.
From the above table prepared by Investdata Consulting Ltd, one can see that the Nigerian market has not only gradually become matured, it has become more sensitive to happenings both in the domestic and international environment, just as the politico-economic space are beginning to align.
From the above analysis about the U.S markets and elections therefore, it can be seen that the 2015 election remained the most uncertain in the country’s political history, following the amalgamation of parties when the PDP’s then President Goodluck Jonathan was given a real fight by a more cohesive opposition.
Notice also that ahead of that Presidential poll, the 2014 pre-election year stock market remains the first to close negative since 1998, shedding 16.14%, compared to the closing level in previous pre-election years when it was always positive. It actually notched 37.8% in 2006, when the PDP’s Olusegun Obasanjo completed his second term and seamlessly handed over to another party member- late Presidential Umar Yar’Adua, at a time many people believed there was no strong opposition to the ruling party.
Besides the effects of the political cycle, share price movement is directly related to such fundamentals as company performance, movement in key macro-economic variables and government actions. The investor really needs to know about the right time to act to reap bountifully in any market situation.
Riding The Tide In An Election Year
Ambrose Omordion, Chief Research Officer, Investdata Consulting Ltd, believes that enough patterns have been provided to enable effective reading of investors mood in a pre-election year, chief of which is the need to target fundamentally strong companies with improving earnings that will drive price after the election.
Investors, he says, must fix their gave on companies with good corporate governance that will most likely attract new and returning foreign portfolio investors; besides those with direct core foreign ownership in place that are likely to increase their stake arising from an expected political stability and reforms.
Investors, he adds, must rely on Technical and Fundamental Analyses of such target companies to know the ‘Buy’ and ‘Sell’ price for maximum profit while mitigating risk.