Investing during an election year
Elections are associated with a significant reduction in investment-to-price sensitivity (in magnitude and statistical significance). The question of whether political uncertainty in Zimbabwe has an impact on economic activity is now being debated.
One of the reasons our economy hasn’t been able to accelerate as forecasted is the uncertainty around the forthcoming elections.
This form of uncertainty can affect the economy and there is substantial evidence explicitly correlating Zimbabwean political uncertainty to changes in corporate behaviour.
Pre-election investment ought to decline more as elections get closer. However, there is the possibility of reverse causality bad economic conditions in a nation, such as low corporate investment, might result in a more heated election as the community reacts to the poor local economy.
It provides a more comprehensive understanding of how political uncertainty affects company behaviour, causing investment to fall and disinvestment to rise before elections and subsequently rebound.
An increase in volatility corresponds to a drop in investment before elections; corporations delay debt and equity issuances before elections; and issuances in election years are less likely to be connected with the commencement of a high-intensity investment phase.
In particular, if a company’s investment becomes less responsive to stock prices during an election year, sales growth will be 6 percent lower over the next two years. Overall, national politics have a significant impact on corporate decision-making and performance.
There are two plausible explanations for directors’ lack of interest in stock prices during elections.
First, the investing “information view” equates elections with uncertainty about future Government activities, which may diminish the information quality of stock prices.
Directors rely more on stock prices in making investment decisions as the amount of private firm-specific information contained in pricing increases.
They will be less ready to base their judgments on information disclosed by stock prices if uncertainty about election outcomes and future Government policies makes investors less informed.
As information quality deteriorates, investment is projected to become less price sensitive.
Also, executives may be less concerned with prices if they become better informed in comparison to outside investors, about post-election changes in economic policies.
Secondly, the information included in stock prices may simply be less meaningful during election years, according to the “political view” of investment.
Investment is frequently politically motivated in countries where interest groups wield great power, and hence stock markets have less room to steer investment decisions.
Similarly, in countries where politically connected directors have privileged access to information or money, or where directors can pay bribes to “buy” preferred treatment from politicians, investment decisions may be more dependent on political ties and less dependent on stock prices.
Potential investors avoid investing in the real estate sector during elections because they are unsure about big changes in Government policy and the resulting drag on the macroeconomic climate.
This might be fuelled by recent volatility and the pre-election year fear and investors can also be inhibited by rising inflation, which has driven up building costs across all indexes.
The current tightening liquidity, which leaves real estate developers short on cash, is usually the optimum time for knowledgeable investors because a shortage of liquidity forces property developers to sell below market value.
Election years can promote probability neglect, a severe cognitive bias that drives us to focus on the worst-case situation rather than our most probable outcome.
This bias gives us the impression that we are defending ourselves from impending hazards, but focusing on our greatest worries might lead to errors.
When their connected political party is in power, investors become more hopeful and increase their allocations to riskier assets. The election is more likely to have a minimal impact on market performance. Less than one-quarter of large market moves may be linked to a major political or economic event.
As opposed to attempting to predict the future, there is need to focus on what we know right. Reflecting on what we are familiar with can be calming in times of uncertainty.
We are aware that time is on our side: we are most likely invested in accomplishing a goal that is more distant than an election or a presidential term. Even in retirement, we will not need all of our funds straight away.
To accumulate wealth, one must find a strategy to make money expand over time while accepting that it will not be flawless. Those periods when you had to hold your nose turned out to be the finest times to invest, in retrospect.
Conversely, the worst times to invest are generally when it appears that the coast is clear. Investors have fared significantly better in the long run by staying invested during election changes rather than investing solely when their chosen party was in power.
Avoid making drastic adjustments to your investments. If you feel like you must make changes to your financial portfolio before the elections, attempt to make incremental changes rather than large swings in or out of equities.
If you do decide to sell some of your stock allocation, keep it to a tiny portion of your portfolio.
This implies you might lose out on gains and won’t be able to fully participate if the market rises.
However, if it helps you stay from selling out of stocks totally later on, it’s a worthwhile decision.
Diversification is one of the pillars of modern portfolio theory (MPT). In a market downturn, a well-diversified portfolio will beat a concentrated one.
By having a large number of investments in more than one asset class, investors generate deeper and more extensively diversified portfolios, minimising unsystematic risk.
The inverse of unsystematic risk is systematic risk, which is the danger of investing in the markets in general. Unfortunately, systematic risk exists at all times.
However, there is a way to lessen it by incorporating non-correlating asset classes into your portfolio, such as bonds, commodities, currencies and real estate.
Non-correlating assets react differently to market fluctuations than stocks do, often in the opposite direction. When one asset falls, another rises. As a result, they level out the overall volatility of your portfolio’s value.
Businesses can utilise asset protection strategies to maintain investment steady even in unpredictable times. The technique of protecting one’s assets, such as real estate and money, against creditors and claimants is known as asset protection.
Every property owner wishes to protect his or her goods from any sort of attack by ensuring maximum security.
Furthermore, escalating criminal activity in residential and commercial areas has necessitated increased security to protect individuals and businesses.
Businesses can safeguard themselves against loan defaulters, theft and natural disasters like fire and flood.
Leasing property owners require an independent company entity to protect their other assets from disgruntled renters. It aids in the protection of other assets in the event that the tenant sues the property owner because he or she can only attack the unit containing the real estate, leaving other personal assets protected.
Another important strategy is to separate personal assets from the corporation, which can be accomplished by forming a corporate entity that shields personal assets from the company.
If you are sued, your personal assets are safeguarded, and you can only pursue the assets of the firm. So, in the worst-case scenario, one will only lose the business while retaining personal assets.
Both large and small businesses can profit from minimizing losses, and this approach can be useful because they are protected from any type of attack.
When firms under-perform during difficult times, they are more likely to be sued by creditors. People may reap big sums of money leaving a corporation broke if its assets are not protected.
Elections can cause market volatility and uncertainty in the short term. However, as the election draws closer, the market tends to settle, owing to a better understanding of the political environment.
Investing before the election allows investors to take advantage of any positive market mood shifts and potential market rallies that may occur once the outcome is announced.
Elections frequently result in policy reforms and initiatives that affect certain sectors and industries. Investing before the election allows investors to position themselves to capitalize on any sector-specific opportunities that may occur as a result of the proposed policies of various political parties.
Dr Keen Mhlanga is an Investment Advisor with high skills in Finance. He is the Executive Chairman of FinKing Financial Advisory. Send your feedback to keenmhlanga@gmail.com keenmhlanga@gmail.com, contact him on 0777597526.-ebusinessweekly
