Small caps could 'pop' on an election honeymoon

Blue-chips do benefit from post-election rallies, but the stocks that really stand to make a profit are in the junior sector.

The federal election is likely to trigger a rebound in the embattled small cap sector with research showing the junior end of the market outperforming strongly during past elections.

Eureka Report analysed the performance of stocks over the past two decades and found that the honeymoon period when a new prime minister is sworn in typically stretches for up to half a year.

While blue-chip stocks do generally participate in any post-election rally, it is the S&P/ASX Small Ordinaries Index that outshines as it has outrun the S&P/ASX 200 Index by a whopping 2.8 percentage point average in the six months after an election.

There is no guarantee that the post-election rally will happen this year, but the odds are very good as small caps have only failed to generate a positive return once since 1993, and that was because the global financial crisis got in the way following the late 2007 campaign that saw Kevin Rudd take the prime ministership for the first time.

Read the full story free on Eureka Report and find out why elections are generally a positive thing for equities and small caps, as well as the sectors that are tipped to outperform from the elections.