What You Need To Know About the Election & Investing

The Australian federal election has been called for 2 July. What does this mean for investors and markets?

Uncertainty associated with the potential for a change of government following the upcoming election has the possibility to impact financial markets, notably shares. There are three ways elections may impact investment markets.

Firstly, there may be an impact as a result of policy changes flowing from a change of government. Secondly, elections themselves engender a degree of uncertainty for investors regardless of any actual policy change. Finally, there is often thought to be a cycle in share markets associated with the political cycle.

History provides little reason to think the outcome of the election later this year will have a lasting impact on the share market. Over the period from 1945 to 2006, the average return from Australian shares under Coalition and Labor governments has not been very different. The average return under the Coalition has been 13.5% per annum (pa) edging ahead of that under Labor governments, of 12.7% pa.

Both the Coalition and Labor agree on the key macro fundamentals – the need to keep inflation down and the budget in good shape, and the benefit of free markets. The key policy impact of a change of government in Australia is more likely to be felt at the sector level than at the macro level.

There is some evidence of a period of softness in the run up to elections followed by a relief rally soon after. Contrary to what might be regarded as conventional wisdom, the Labor victory of 1983 was soon followed by a surge in the share market, whereas the 1996 Coalition victory was followed by period of uncertainty.

The best example of a political cycle impacting investment markets is that associated with the US presidential cycle. The US presidential election is held every four years in November and there is clear evidence that this affects the US share market. The chart below shows the average return since 1927 for US shares for each of the years within the four-year presidential cycle (where year four is the last year of the President’s term).

Source: Thomson Financial and AMP Capital Investors

It can be clearly seen that year three is the strongest as this is when the President stimulates the economy to aid his party’s election chances in year four. Years one and two are the weakest.

What is clear though is that after elections shares tend to rise more than they fall.The next table shows that 8 out of 11 elections since 1983 saw the share market up 3 months later with an average gain of 5.4%, which is above the 1.8% average 3 monthly gain over the whole period.

Instead, it’s important for investors to think about the long-term performance of the markets rather than what they’ll do in the next few months.

Investors need to accept that generating good returns in the short term will be a hard slog, particularly now that extra uncertainty has been injected into the mix with a lengthy election campaign, but there are good returns likely for sharemarket investors with a three- to five-year time frame.

Perhaps the biggest area of concern lies in the superannuation sector, which Prime Minister Turnbull has indicated removing existing concessions for those with high super balances.