2024 a big year for local and global elections – what this means for investors

In 2024, more than 20% of the world’s population will go to the polls as over 40 major elections will be held, including South Africa’s own national elections happening this week.

“Politics has become a significant source of volatility in financial markets, more than in the past,” Kondi Nkosi, country head in South Africa for global investment manager, Schroders, says. 

“It has become increasingly important for investors to be conscious of the political backdrop when making investment decisions. After all, government policy changes can have a profound effect on a company’s future profitability.”

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This is not to say that investors should try to predict the future, he says. “There have been a number of elections in recent years which resulted in surprising outcomes and therefore it is best for investors to focus on long-term investments they believe can ride out political storms and news flow.” 

What are the implications for investing in a time of political change?

“Politics can create short term noise. Although the market likes to focus on events like elections, political trends tend to play out over months and years. But if you can withstand the volatility, it is best to sit on your hands and wait for it to pass,” Johanna Kyrklund, group chief Investment officer says.

Bank any profits before the election

“If you really have to trade, then it may be wise to bank any profits before an election. But investors should always avoid knee jerk reactions when results come out.”

Alex Tedder, co-head of equities, says short-term market setbacks, like those created by political uncertainty, can prove very helpful for more patient investors looking to generate returns. “Over the long term, we still feel that this is a bigger determinant of investor returns than trying to respond to political events.”

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Alex Monk, portfolio manager for global resource equities, says the US election in November 2024 will be most important for energy transition equities, given the risks to Inflation Reduction Act (IRA) support in a strong Republican win.

“Although support to energy transition sectors is unlikely to be removed in its entirety, the leading runners for the Republican nomination have talked about repealing aspects of the policy, making the risk of a reduction in support a credible threat.

“Regardless of the ultimate outcome, we would at least expect those names that currently benefit most from the policy to experience volatility as the election looms. Outside of the US, major elections in Taiwan, India, Mexico, South Africa, the UK and Belgium must all be watched.”

Politics important for many investors

Simon Adler, fund manager for the global value team, says they understand that politics can be an important consideration for many investors. “After all, the political instability in countries in, say, Africa and South America, can be disconcerting, especially when they lead to industrial unrest, strikes in key sectors such as power, the imposition of emergency measures and so on.”

He says while Schroders is mindful of the possible impact of political events, it avoids buying into any prevailing opinions or other ‘noise’ that could influence portfolio decisions. “On the global value team, we believe an unemotional, valuation-based approach to investing should deliver over the long-run regardless of politics and indeed we can point to more than 100 years of history that backs this up.“

Duncan Lamont, head of strategic research points out that stock markets often fall in the near-term when geopolitical risk spikes, as markets re-assess risk. “Past performance is not a guide to the future and every situation is different but, historically, they have started to recover strongly within a matter of months. Staying the course rather than reacting rashly has worked out for the best.”

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It is about the destination, not the journey, he says. “We have no way of knowing yet whether Trump will seize power again in the US, or whether we may see various iterations of coalitions in South Africa and what these may look like. More important is the direction of political travel and how it could impact investment prospects either locally or abroad.”

Nkosi adds that while the political outlook may be getting more complicated, a resilient long-term investment strategy that can withstand political shocks is likely to help investors navigate what lies ahead.

Investors must be careful in election market sentiment

Roger Eskinazi, managing partner at Tickmill says traders are advised to take caution amid upcoming elections market sentiment.

“As we find ourselves in the thick of election season, traders and investors are strongly advised to exercise caution and avoid making rash decisions based on emotional biases given the uncertainty of the outcome of the national election taking place this week.”

He remembers five years ago, South Africa experienced a phenomenon known as “Ramaphoria”, following President Cyril Ramaphosa’s narrow victory. “Initially, domestic equities and the South African rand rallied strongly. However, within just two months, the rand weakened by 8% and banks and insurers saw declines of more than 10% following the administration’s announcement.”

Similarly, irrational market behaviour was observed during these significant political events, he says:

• Nenegate (2015): The dismissal of finance minister Nhlanhla Nene resulted in a temporary rand volatility
• Zuma unrest (2021): Despite the initial turmoil, the rand remained relatively stable amid the chaos.

Eskinazi says recent strength in the rand can be largely attributed to a weaker US dollar and cautious optimism regarding the election outcome. “Market sentiment suggests a possible scenario where the ruling party may lose some ground, but not enough to result in a destabilising coalition.

“Should the election result in a favourable outcome, it is likely that the rand will strengthen and banks, insurers and domestically sensitive stocks will outperform.”

He says in this sensitive period traders are advised to align their trades with thorough valuation assessments and consider their time horizons and remain aware of exogenous events that could trigger irrational emotional responses.