ASX not waiting with bated breath for result of election
Research from Goldman Sachs has dampened hopes of a post-election fillip on equity markets, saying that historically there is little evidence to support that theory.
Goldman strategist Tim Toohey said changes of government in the past had actually had the opposite effect, resulting in a period of slower, rather than accelerated, economic activity.
"The assumption that elections lower confidence and delay spending in the lead-up to the poll date is not supported by the economic data," Mr Toohey said.
"[And] we find little evidence to suggest that the passing of a federal election results in a surge in retail spending, confidence and asset prices.
"Typically, the $A declines, equity markets decline, bond yields rise, and the path of economic indicators is mixed in the months following the result."
Mr Toohey said in the past three elections in which there was a change in government, the equity market sold off 1.2 per cent a month before the poll, was 0.2 per cent in the week afterwards, down 0.9 per cent in the fortnight, and a month later was down 2 per cent.
In the case of the Australian dollar, Mr Toohey said a change of government had historically resulted in a 2.6 per cent fall in the week after the election and held onto those losses for the first month of the new regime.
Bond yields, meanwhile, have risen on average 4.2 per cent in the month afterwards.
Mr Toohey said it was possible there would be a lift in some measures of confidence but it would be mild.
He said it was unlikely that business conditions would recover without a broad-based recovery in consumer spending, adding that "slowing household income growth suggests a cautious consumer will persist. Recent easing in financial conditions and the rise of household wealth through 2012-13 will help, but the lags from both forces are long and in the interim they will have to navigate further fiscal drag."
But despite Mr Toohey's conclusion based on hard evidence, talk of happy days on the ASX after the poll is still swirling.
RBS Morgans chief economist Michael Knox said in a client note that regardless of who won the election, a clear result would boost the sharemarket.
"A look back at the last 30 years and 11 elections has seen the Australian stockmarket increase by 1.31 per cent each month on average in the three months following an election. That equates to an almost 4 per cent gain for the quarter immediately following an election," Mr Knox said.
"This increasing confidence acts like a reduction to the risk premium and is similar in its effect to an interest rate cut in that the flow-through to GDP has a lag of about five quarters. Therefore, we should see the more long-lasting result from an election outcome continuing on throughout 2014."
But Ig Markets strategist Evan Lucas agreed with Mr Toohey, saying whatever happened on Saturday it was unlikely that Monday morning would "see a scorched-earth or grass-is-greener moment".
Mr Lucas said the markets were more likely to react to global issues - the US Federal Reserve meeting on September 17-18, where it is widely tipped the central bank will agree to start winding back its $US85 billion-a-month stimulus; the German election on September 22; and the Syrian conflict.
"This election from a market perspective is a non-event," he said.
Frequently Asked Questions about this Article…
Not necessarily. While some analysts expect a clear result to boost the sharemarket, Goldman Sachs research (Tim Toohey) finds little historical evidence of a consistent post-election windfall. RBS Morgans’ Michael Knox notes the market has averaged modest gains in the quarter after elections, so outcomes are mixed and any boost may be modest and gradual rather than an immediate surge.
According to Goldman Sachs strategist Tim Toohey, in past elections with a change of government the equity market typically sold off about 1.2% in the month before the poll, was down 0.2% in the week after, down 0.9% over the fortnight, and about 2% lower one month later — suggesting short-term weakness has occurred in similar situations.
Goldman Sachs’ analysis shows the Australian dollar has historically fallen about 2.6% in the week after a change of government and tended to hold those losses through the first month. Bond yields have typically risen, on average about 4.2% in the month following a change.
Any lift in confidence after a clear result is likely to be mild. Tim Toohey says a broad-based recovery in business conditions is unlikely without a sustained recovery in consumer spending, and slowing household income growth suggests consumers may remain cautious despite some easing in financial conditions and past rises in household wealth.
Probably not. IG Markets strategist Evan Lucas argues it’s unlikely the market will have a dramatic ‘scorched-earth’ or ‘grass-is-greener’ moment the morning after the poll. Markets are more likely to be driven by other global catalysts than a one-day election reaction.
The article highlights several global issues that could move markets more than the election, including the US Federal Reserve meeting (where tapering of stimulus was expected), the German election, and geopolitical risks such as the Syrian conflict.
Analysts use different historical windows and metrics. Goldman Sachs points to hard evidence that elections haven’t reliably boosted markets, while RBS Morgans’ Michael Knox looks at a 30-year record where the stockmarket averaged modest quarterly gains after elections. The result: mixed historical evidence and differing interpretations of how confidence and risk premia translate into market moves.
The article suggests investors shouldn’t assume an election automatically creates a big market windfall. Historical evidence is mixed: any market effects are often small, temporary or lagged, and global events and economic fundamentals can be more important drivers. Keeping expectations realistic and watching key indicators (consumer spending, household incomes, global policy events) is a sensible approach.
Call 1300 880 160
Start a chat
Schedule a call
