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Elections and economics, what should I do?

| Market Forces

Theoretically, recurring events such as elections should create predictable patterns in the behaviour of various asset classes during election years. By implication, this should also translate into predictable investor behaviour. While this may sound simple in theory, each election period and market cycle present various dynamics. Elections are important market events for multiple reasons including economic policy shifts, potential legislative changes, and investor sentiment regarding the outcome and who the elected leader will be. However, as recurring as elections may be, some carry greater significance than others, which begs the question – is this time any different?

Global elections

The year 2024 is widely regarded as a record-breaking election year, with national elections taking place in more than 60 countries globally. Approximately half of the global population (four billion people) will be voting in 2024. Some have voted already. These elections are accompanied by increased market and economic uncertainty, and the World Economic Forum (WEF)’s Chief Risk Officer’s Outlook for 2024 has identified geopolitical risk as the biggest risk for 2024. According to the WEF’s findings, continuing volatility in geopolitical and geoeconomic relations between major economies is the biggest concern for chief risk officers in both the public and private sectors.

Most eyes are on the largest economy in the world – the US, with considerations on whether its election outcome will stimulate or depress the global economy and financial markets. Human behaviour also changes with time and current issues such as artificial intelligence, high inflation, and high interest rates (amongst others) might be assigned greater importance than previous issues. Thus, Wall Street has identified key holistic issues for the US to tackle for this year’s election related to economic policy, foreign policy and sectors and industries, presented in the table below. This is contrary to various voter groups in the US who focused on social issues with little direct or immediate impact on economic growth.

Economic policy Foreign policy Sectors and industries
  • Inflation
  • Tax policy
  • Federal spending
  • Federal debt and deficit
  • Immigration
  • Student loan debt
  • Treasury/Fed appointments
  • Washington gridlock
  • Tariff and trade policies
  • Sanctions
  • US-China rivalry
  • Onshoring, near-shoring
  • Friend-shoring
  • Deglobalisation
  • De-dollarisation
  • US/NATO-Russia risks
  • A wider Middle East conflict?
  • Multipolar world
  • Energy policy
  • Energy transition
  • Green initiatives
  • Infrastructure spending
  • Tech subsidies
  • Tech and AI regulations
  • Health care policy
  • FDA rules
  • Defence spending
  • Banking regulations

Source: RBC Wealth Management, May 2024

Domestic elections

In South Africa, elections take place every five years. The most significant election occurred in 1994 as it set the precedent for South Africa’s democracy. Every domestic election, including this year’s, is associated with evolving fiscal policy, whether a continuation or a reform, which in turn has a direct impact on economic growth and investment. Over the past election years, South Africa has experienced notable issues including stagnant economic growth, record-breaking loadshedding, failing logistics infrastructure and high levels of unemployment (among others), which heighted uncertainty around elections. These issues were also present during non-election years, impacting South Africa’s confidence and the overall foreign direct investment vital for economic expansion. Consequently, this motivated more local voters to register for this year’s elections, with over 27 million South Africans registered to vote – compared to over 18 million in the early 2000s – as seen in the chart below.

Source: Electoral Committee of South Africa, May 2024

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.

S&P 500 price performance since 1950
  Election year performance All years’ performance Non-election year performance
Average 7.26% 8.86% 9.29%
Median 10.66% 11.59% 11.85%
Maximum 25.77% 45.02% 45.02%
Minimum -38.49% -38.49% -29.72%
Volatility 13.93% 16.55% 17.72%
Positive years 83.33% 72.22% 68.52%

Source: Beyond Wealth Advisers, 2024

To assess the short- and long-term volatility of domestic elections and political 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.

Election Year Year return ZAR/USD
1999 -4,04%
2004 15,57%
2009 25,29%
2014 -4,81%
2019 -13,20%

Source:, 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 point 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 expectation of pro-business policies can prompt bullish market behaviour and vice versa. Additionally, the anticipation of election results is fueled 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.

Volatility is all part of the investment journey

At Graviton, we believe that any changes made to investment portfolios should take cognisance of the long-term financial plan of individuals and not short-term events. Market volatility is often short- term in nature and an investor needs to have a long-term investment horizon to ride out temporary market downturns. It is easy for investors to fall victim to the headlines and uncertainty around elections. However, it is important to remain up to date on relevant investment fundamentals so that they can make informed investment decisions. Volatility is part of the investment journey and a continued focus on fundamentals can assist in achieving long-term objectives.  Stay the course.

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