Phl presidential elections and the stock market

With the 2016 presidential elections just a week away, many of our investors have been asking about the effect of elections on stocks and the peso. Many have also been wondering about the effect of the different candidates on the stock market and currency. With Davao City Mayor Rodrigo Duterte leading the surveys (see Groundswell, April 18), many people are in a quandary on what to do with their investments.

Politics matter

Readers will note that Philequity Corner articles usually cover topics regarding the economics of our country (ex. GDP growth, interest rates, inflation), global macroeconomics and the fundamentals of corporations. While a thorough understanding of economics and fundamentals are crucial to investing, politics may play an important role. As we have seen in other countries, leadership may affect the currency, stock market and, ultimately, the country itself.

With many investors asking questions about the coming elections and its effect on the stock market, we decided to look at how the stock market performed during the different Presidential terms.

PSEi returns and elections

In the table below, we show how the stock market performed under the different Presidents. Please note we used the following metrics:

1. The PSEi’s return is measured using different timeframes, namely, one week, one month, one year, three years and six years.

2. For the six year timeframe, the reckoning period used is the time between the first Presidential election and the succeeding presidential election (ex. for President Fidel Ramos, the election to election reckoning period is from May 11, 1992 to May 11, 1998).

3. For Cory’s term, the starting point is Feb. 25, 1986, when the EDSA Revolution brought about a change in regime.

4. President Joseph Estrada’s term lasted less than three years as it was cut short by impeachment in 2001, so the end of his term would be the starting point of GMA’s 1st term as president.

5. For GMA’s first term, the election to election figure is calculated from when she assumed office on Jan. 20, 2001 until May 10, 2004, the next Presidential election.

Historical returns of the PSEi through the different presidents

Source: Wealth Securities research

*    Reckoning point is after the EDSA Revolution, not snap elections

**   Only until end of term on Jan. 20, 2001

***  Assumption into office after Erap’s impeachment, not an election period

**** As of closing on April 29.

Expect short term volatility

Based on the table above, one will notice that the one-week and one-month performance for the PSEi is mixed. During the terms of Cory, FVR and PNoy, the PSEi showed a positive return. However, when Erap and GMA were elected, the PSEi was down in both the 1st week and 1st month after elections. As is the case with any asset class, it is difficult to predict short term performance, especially as our election statistics over short timeframes are inconclusive.

Better with time

However, if one takes a longer timeframe, such as 12 months, the conclusion is clearer. In all cases (except GMA’s 1st term), the one-year return of the PSEi has always been significantly positive, ranging from 14.8 percent in Erap’s term to as high as 294.9 percent post-EDSA revolution.

Returns for the PSEi three years after elections are even more impressive. During the terms of Cory, FVR, GMA and PNoy, the PSEi was up triple digit percentages. To explain the tepid performance in two of the time periods, we note the Philippines had a political crisis in 2000-2001, while GMA’s unelected term coincided with skyrocketing oil prices because of the conflict in Iraq.

Double in six years

As can be seen from the table above, the first few weeks and months after elections tend to be volatile. However, it also shows the PSEi tends to be higher towards the end of a presidential term. In most cases, the index still rises significantly despite coups, natural disasters and bear markets. In Cory’s time, she experienced two bloody coups, a destructive earthquake and a major volcanic eruption, and yet the PSEi was still up more than eight times by May 11, 1992. We can also see that even through bear markets such as the 1997 Asian Financial Crisis and 2008 Global Financial Crisis, the PSEI still managed to gain 79 percent and 102 percent by the time the next elections came around. This goes to show that despite the many crises and disasters that come our way, the stock market tends to double in one presidential cycle (six years).

Wait and see

However, the strong showing of Duterte in the most recent surveys has caused many investors and fund managers to adopt a wait and see attitude.  In fact, economists surveyed by Bloomberg have expressed apprehension over Duterte who is leading all the recent surveys by a wide margin. As the table above shows, this uncertainty continues after elections, especially if the candidate is someone investors are not comfortable with. This can cause the market to remain tentative in the short term.

Shoot first, ask questions later

Duterte, the current Presidential frontrunner, has openly admitted his mouth is his weakness. His many controversial statements have made headlines not just here, but even in foreign newspapers and news programs. Many political observers have described him as quite unpredictable and erratic. His perceived “shoot first, ask questions later” attitude has also made many people nervous. Recent allegations of dubious bank accounts and illegal accumulation of wealth may also hound him heading into elections and thereafter. All these may lead to heightened volatility for stocks and the peso in the short term.

Economic agenda is of paramount importance

Moving forward, what is of paramount importance is the next president’s program of government and economic agenda. Equally vital and critical is the appointment of the next government’s Cabinet members and advisers. While the president sets the tone and direction of the government, his Cabinet will ensure the smooth and effective execution of his plans. Therefore, choosing the right people is crucial to maintaining investor confidence. Fortunately, we do not lack capable, well-intentioned individuals and technocrats who have a deep love for country. The next President just has to tap them in order to ensure that our country continues the upward momentum set in place by previous administrations.

Fundamentals will prevail

While leadership matters, we still believe the strong fundamentals of the country are more important. Our fast growing economy is supported by a young demographic profile, resilient OFW remittances, robust BPO revenues, strong domestic consumption and rising corporate earnings. Thus, regardless of the president, history shows the stock market will always move higher over the long term. Despite the many crises that befell us, our country still continues to move forward.

So, to answer the question at the start of the article: In the short term, the stock market tends to be volatile with no clear direction. However, over the long term, the strong fundamentals of the country do prevail despite the volatility brought about by a change in leadership. Unless institutions are destroyed or left unable to perform, statistics show that by the next election in 2022, the stock market will be substantially higher than where we are today.

Philequity Management is the fund manager of the leading mutual funds in the Philippines.  Visit www.philequity.net to learn more about Philequity’s managed funds or to view previous articles.  For inquiries or to send feedback, please call (02) 689-8080 or email [email protected].