Value Investors should look beyond the election
Dear Investor,
Our research team analysed the historical performance analysis on stock returns in election years.
The highlights are as follows:
- In the last five elections, there has been 2 up years (2003 and 2007) and 3 down years (1999, 2011 and 2015).
- In the year after the elections, there has been 3 up years (2000, 2004 and 2012) and two down years (2008 and 2016).
- In the first half of the election year, stock market return was positive in all years excluding 2015.
- In the second half of the election year, stock market return was positive in only 2 of the last five elections (2003 and 2007).
Future performance does not always mirror historical performance but it does matter to know a lot about the past to guide risk management.
While investing in the market looks very attractive today, we must exercise caution in using leverage.
“The market can remain irrational longer than you can remain solvent” – John Maynard Keynes
We think where market valuations are today, it is a good time to enter but we must invest cautiously. For investors seeking to make big pre-election bets in the market, we advice investing gradually by putting 10 percent of investible fund in the market every week over the next 10 weeks. This can help to protect you from market volatility during the election period and benefit from lower prices if market falls any further.
As we can see the stock market could take any direction in an election year. However we observe that in the following year after the election, there’s a higher probability of generating positive returns in the market. In fact, the only years when the stock market wasn’t profitable for investors following an election year was in 2008 when the world entered its worst financial recession since 1928 and 2016 when Nigeria fell into its first recession in 25 years.
Save another global economic recession in late 2019 or 2020 (which is increasingly looking like a strong possibility), we expect Nigeria’s equity market to generate double digit returns over the next few years, even outperforming bonds, treasuries and currencies.
We are well aware that it is a bold argument to say that we expect market to turn around and outperform over the next few years considering the stock market has remained flattish since 2013 but we are fundamental investors and the fundamentals compared to market prices have rarely ever looked as the good as they do today after bearish sentiments have all but brought investors to their knees.
Stubborn as ever, we remember, “The safest and most potentially profitable thing is to buy something when no one likes it” – Howard Marks. By buying stocks no one is willing to touch but should we ensure we profit from big price rebounds when everyone else realizes their mistake.
As we await 2018 earnings reports by publicly listed companies, we are confident that the market will be reminded about how many companies continue to post strong financial performance despite the underwhelming economic performance.
Till investors are reminded by the company reports between Q1 and Q2, don’t expect a rebound.
