Key challenges to elections
1. Asset class behaviour
Investors tend to place great importance on the outcome of elections as an indicator of future economic growth. However, the election outcomes are not the only important factor for asset classes. Asset classes are associated with numerous levels of risk, creating the potential to deliver positive or negative returns in various market conditions. Historically, asset class returns have continued on an upward trend over the longer term, regardless of election outcomes. An example of volatility during both election and non-election years is the performance of the S&P 500 between 1950 and 2024. The index has posted positive returns in both election and non-election years at 83.33% and 68.52%, respectively. During the 2008 global financial crisis – a shock event influencing the direction of the trendline – the S&P fell 38.49%. Although the figure detracted during that period, the index still managed to deliver long-term returns over both election and non-election years.
To assess the short and long-term volatility of domestic elections and polotical risks, we looked at the investment growth of R100 invested in global equities (MSCI World ZAR), domestic equities (FTSE/JSE All Share Index), bonds (FTSE JSE All Bond Index), property (FTSE/JSE Listed Property Index) and cash (SteFI composite) over a 22-year period, from 2002 to 2024. This takes into consideration multiple domestic election periods. From the chart, it is not evident where elections have taken place and impacted the longer-term performance of asset classes. While elections occurred in 2019, global markets took their lead from the COVID-19 pandemic rather than idiosyncratic presidential elections. According to Moneyweb, a study of past election cycles reveals that financial markets tend to experience heightened fluctuations during these periods. Economists and analysts forecast that markets will be volatile before the domestic elections, with the uncertainty decreasing after the results are announced.
Source: Morningstar, Glacier Invest, May 2024
This is particularly noteworthy since different asset classes and their respective subsectors have different sensitivities to the perceived impact of post-election policies. Moreover, there are periods where an asset class declines in value from a relative peak, which results in a drawdown. The chart below depicts the drawdowns of the asset classes from 2002 to 2024, indicating that market drawdowns are not only determinant on election periods.
Source: Morningstar, Sanlam Investments Multi-Manager, May 2024
2. Currency movement
The direction the rand takes is a function of both global and domestic factors, the way monetary policy is executed by central banks, and fiscal policy is executed by the government. The reigning domestic government aims to be re-elected by launching initiatives to reduce unemployment and stimulate economic growth. While election outcomes may impact the sovereign risk of a country, long-term movements are a function of numerous other factors too. As illustrated below, there seems to be no clear correlation between election years and currency movements in South Africa.
Source: Investing.com, May 2024
Generally, the rand’s strength or weakness against other currencies is based on the increased demand or reduced supply in the foreign exchange markets. Research from the International Monetary Fund (IMF) also points to commodity price volatility, global market volatility, domestic political sentiment, and US economic surprises as the drivers of rand volatility. The reality of these issues tends to reverse the rand’s appreciation, providing further evidence of the short-term impact of elections. While rand volatility might discourage some investors, it also presents opportunities for those with a long-term investment horizon. South Africa’s diverse and resource-rich economy, growing middle class (albeit slowly), and infrastructure development initiatives offer potential avenues for growth if supported by robust policy.
3. Investor sentiment
Positive sentiment driven by the expectation of pro-business policies can prompt bullish market behaviour and vice versa. Additionally, the anticipation of election results is fuelled by the outcome possibilities which determine whether a country will improve, remain the same or deteriorate economically. Investment professionals and financial advisers can help investors during election years to decide whether they should adjust their portfolios, remain invested or consider structural changes.