Impact of Elections on ASX

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Australian Economy, Uncategorized

Are 2016 Fed elections going to impact ASX?

Public Announcement regarding the confirmation of the upcoming Australian Federal elections on July 02, 2016, has once again put the Labour and the Coalition in the election race. Once again the time has come to speculate about impact on sharemarket and economy.

Stock market impact of Fed elections

With the arrival of the elections, a period of uncertainty and risk is arising in the markets with the S&P/ASX 200 (INDEXASX: XJO) falling over 1.09% in the last five days (as of June 24, 2016). However, Brexit has also contributed to the recent market volatility. Meanwhile, market uncertainty and risk are directly correlated to duration of the electoral campaign – the longer the campaign, the more the market uncertainty and greater the risk or vice-a-versa. The current Australian election campaign was said to be running for almost eight weeks indicating that it has been a long campaign and accordingly the investors need to withstand the greater degree of market volatility.

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Australian market performance during previous election periods (Source: ASX)

As per the earlier election campaigns, Australian markets delivered a flat performance or even generated only small returns during the campaign period. But, after elections, the markets were on a relief rally mode and gave higher returns. According to previous data, the impact of the election outcome on Australian stock market is mixed and the share markets have gained average of 4.8% three months’ post elections.

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Past performance of the stock markets (Source: ASX)

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CMC’s Market Election Sentiment Index performance

Meanwhile, with CMC Market Election Sentiment Index (ESI), which has been launched to track impact of the Election on the stocks, investors can have an opportunity to reposition their portfolio after observing the trends. This index considers the performance of the Australian share market to international benchmarks and takes into account specific Australian factors. If ESI moves higher it indicates that the market sentiments are positive; and if it moves lower, then the market sentiment is negative and the elections are weighing on the stocks.

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CMC ESI (Source: CMC Markets)

Parties’ impact on ASX performance

As per the upcoming elections, the fight is between the lower taxes, smaller government and slight economic reform from the Coalition. But the labour party is bigger government, with more taxes and further intervention in the economy. AMP capital indicates that there would be more volatility for the current elections and investors are apprehensive whether the governments would be able to improve the current living standards in Australia and improve reforms. The Coalition Governments have said to be generating better returns of 12.8% per annum after the war period while Labour Governments generated over 10.7% per annum.

S&P/ASX 200 (INDEXASX: XJO) recovered a little early last week on the back of easing fears on Brexit outcome but slipped towards the end of the week. Moreover, based on a recent study, consumer sentiments have been fluctuating at the back of RBA interest rate cut decisions, economic growth scenario and so forth. What is seen is that investors are already repositioning their stock portfolio ahead of the fed elections.

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