Back home, our own Government has just laid out its action plan for its third quarter in charge.
All this political change begs the question: can a politician, political party, or political event have a tangible impact on the sharemarket and, therefore, your KiwiSaver investment over a relevant time horizon?
The short answer is no. What makes political events hard for investors is they can be unpredictable and volatile, and even if the event was correctly predicted by investors, sharemarkets might not move as the investor expected.
Investors should instead concentrate of what drives share prices (and the sharemarket) and that is a company’s earnings and growth of those earnings. A change in a politician and their policies, more often than not, doesn’t interrupt that.
Looking back to 2016, when Trump took on Hillary Clinton for the White House, the polls didn’t expect Trump to win.
Even if you accurately predicted the Trump election result, how would that have changed what you bought or sold on the sharemarket? Most thought a Trump victory would be negative for the stock market.
A quick Google search shows headlines from October 2016, just before the election of, “Economists: A Trump win would tank the markets” from Politico and “The stock market doesn’t like the idea of a Trump Presidency” from PBS (Public Broadcasting Service).
Instead of the market dropping like many predicted, the S&P 500 increased in value by 5% from November into the end of the year. The narrative changed from tanking the stock market to lower taxes, deregulation and fiscal stimulus being supportive for company earnings and therefore equity prices.
This example highlights that even if you predicted the event correctly, understanding the markets expectation of that event is very difficult.
Staying with our 2016 reflections, a similar dynamic played out with Brexit when the United Kingdom voted narrowly to leave the European Union. In the immediate aftermath of the referendum, the FTSE 100 index dropped sharply, losing around 8% at its lowest point.
This was due to the uncertainty surrounding the UK’s future relationship with the European Union and the potential impact of Brexit on the UK economy.
However, the index soon rebounded as the British pound fell against the euro, US dollar and other currencies which benefitted the FTSE 100 index as its constituents earn around 65% of revenues outside the UK.
By year end the FTSE 100 had risen 15%.
Political, even legislative, change is often only short-term and investment is all about the long game. So, when those two billion voters around the world are casting their votes this year, try to turn down the noise that comes at you every day and focus on what is tangible.
Don’t make sweeping generalisations about the impact of political outcomes and change your KiwiSaver account settings.
This might also be a good time to add that, with the exception of George W Bush, whose presidency included the Global Financial Crisis, the US S&P 500 index has delivered 10% plus compound average returns no matter if the President is Democratic or Republican since Richard Nixon resigned office in 1974.
Therefore, if you have investments, focus your efforts on your long-term goals and make sure you are in the right fund to achieve them. Consistency is key – and likely to be a more effective strategy for achieving good investment outcomes than investing based on your views on politics.
