WHAT STOCK MARKET INVESTORS MUST CONSIDER IN THE 2018 PRE-ELECTION YEAR
In every economy of note around the globe, it has long being
established that the political mood of the country has effect on its financial
markets as investors and at such times, particularly foreign portfolio managers
stay as close to cash as possible, in a pre-election year depending on their
own perception of where the votes may swing in the Presidential ballot.
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.
Pre-Election Years Market Trend & Performance
1998 TO 2014
Years
|
Open
|
Close
|
%
|
1998
|
6,440.51
|
5,680.06
|
Down by 11.8%
|
2002
|
10,903.80
|
12,059.20
|
Up by 10.60%
|
2006
|
24,085.80
|
33,189.30
|
Up by 37.8%
|
2010
|
20,827.17
|
24,770.52
|
Up by 18.93%
|
2014
|
41,329.19
|
34,657.15
|
Down by 16.14%
|
2017 To Date
|
26,874.62
|
37,709.20
|
Up by 40.32%
|
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.
Best regards
Ambrose
Omordion
CRO | Investdata Consulting Ltd
info@investdataonline.com
info@investdata.com.ng
ambrose.o@investdataonline.com
ambroseconsultants@yahoo.com
Tel: 08028164085, 08032055467
CRO | Investdata Consulting Ltd
info@investdataonline.com
info@investdata.com.ng
ambrose.o@investdataonline.com
ambroseconsultants@yahoo.com
Tel: 08028164085, 08032055467
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