The general election is about six weeks away. Although we don’t know which candidates will win, it’s not too soon to start thinking about what the election will mean for investors.
What will the future look like for our markets? How should investors react to what may be a tight campaign? Should investors fear either party winning the race? Is it best to sit on the sidelines until the dust settles?
These are key questions as there is a lot happening already.
The country’s public debt stands at Sh8.2 trillion (as at December 2021), the shilling is trading at an all-time low of Sh117 against the dollar, inflation is trending high at 7.1 percent due to rising oil prices, Covid-19 cases are going up again and the markets can't take it anymore.
Eurobond yields are now spotting double-digit yields, up from single-digit January levels, equities are down 17.8 percent year to date, foreign investors have net sold a total of Sh117 billion worth of stock.
One may say the asset markets — both equity and fixed income — have priced in political uncertainty and changes in the policy agenda.
On the surface, with the two leading contenders Kenya Kwanza and Azimio, their economic proposals taken together, none seem to be clinically addressing the above issues. All seem focused on a populist expansionist agenda, which is really taking the country over the edge.
I am not an economist but I understand that more spending would at the least bring about likely longer-term tax increases and increase public debt. There’s also a real possibility that the incoming Parliament could be split right in the middle.
In other words, gridlock means neither party is likely to enact sweeping legislation. Whereas, both sides can learn the art of compromise to get something done, too much stalemate will be a bad thing, as key campaign promises may not be delivered.
It is also possible that it may take a while for the two sides to bridge their differences. All in all, a fair amount of uncertainty for the market and the economy.
But while the drama of general elections can make one's imagination run wild, it really doesn't matter.
There is just no simple way to predict stock market returns based on general elections. And even when investor predictions are correct, the market tends to price issues well ahead of time.
The best rule of thumb may simply be to stay invested and make sure the portfolio is rebalanced when necessary.
Long-term investors should particularly heed this and not over-react to day-to-day election coverage or political pronouncements.
And just like in all times, investors need to ensure they have all the components of a diversified portfolio in place.
Although they might feel strongly about one political party or the other, when it comes to matters of investment, it doesn’t matter much which party wins the elections.
The relationship between politics and the stock market is not simple and obvious. In the long run, it’s economic growth that matters.
More importantly, returns are made over a full business cycle, which is longer than even one general political term.
Writer is MD, Canaan Capital.
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