Elections Can Be Swing Vote in Fate of Global Economies

Thursday, 16 Feb 2012 09:53 AM

By Ashish Advani

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This year has started out with optimism and doubt, both at the same time.

While we see the fledging growth in the United States, we are seeing a real drag on global growth from Europe.

This is now the second year of the European crisis and I don't believe that it is over yet. It will continue to drag the global growth down at least for this year if not longer.

This year is also relatively unusual as we are going to see several high-profile elections all around the world. More than 60 elections are scheduled around the world, in economies accounting for almost 40 percent of global GDP. This is the second-highest share in the past five years, and is higher than in 20 of the past 32 years. Indeed, 2012 and 2013 together will see more than 100 elections, in economies accounting for approximately 60 percent of global GDP.

Elections are important market events, for at least three reasons. First, the political stakes in presidential, parliamentary or legislative elections often translate into changes in policies which can reshape the economic environment. Second, the regularity with which elections take place in most countries may give place to cyclical patterns in government and investment behavior. Third, elections can markedly increase political and social uncertainty. These three factors have the potential to affect all asset classes, especially equities, given their strong sensitivity to changes in the economic outlook.

Nothing stalls the equity market growth in the United States more than an election year.

• In the United States, the four-year election cycle (starting in November of the presidential election year) is associated with noticeable patterns in equity returns. In general, the first two years of the cycle tend to show lower returns than the last two (around 3 percent-4 percent vs. 10 percent-12 percent on average), with returns particularly strong in the third year and the second particularly volatile.

• In the months running up to elections, returns tend to move sideways as a reflection of unresolved uncertainty. As uncertainty fades, either slightly prior to the election or after the results are confirmed, returns tend to bounce back gradually. Volatility often sees a first post-election blip (as markets digest changes) and then a gradual increase towards the second year of the cycle.

While global equity markets take a cue from the U.S. markets, there is still the macro growth story abound that will help diverge the emerging markets returns in this year.

The challenge also is compounded with several high profile elections in emerging markets. India is going through a cycle of elections right now. That cycle will end in March. March will also bring the budget announcements which can raise a market up if there is enough for the common man.

China will see a transition of the top leadership in the second half of the year. That alone will stall Chinese stock market growth till later this year. Russia, France, Egypt, Italy, Greece, South Korea and many other countries will see shifts in the governments.

We can be tactical in timing our investments tactically and spreading out the investments in the various locations or we can get strategic and invest in India post elections and budgets and then into China post transition of leadership. Hong Kong is also a viable proxy for some Chinese investments.

One major asset class that will continue to see a boom is commodities. As long as we have fear rampant through the economic circles (Iran installing nuclear rods in its centrifuges today) we will continue to see a boom in commodities including gold and silver.

Let us ensure that we allocate a portion of our investment portfolio in gold and silver as well as industrial and soft commodities.

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