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External events will impact stocks more than GE outcome: analysts

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The results of the coming general election are likely to have little to no impact on local stocks, analysts say, adding that external macroeconomic factors such as China's economy and the United States' impending interest rate hike are likely to be far more influential.

Singapore

THE results of the coming general election are likely to have little to no impact on local stocks, analysts say, adding that external macroeconomic factors such as China's economy and the United States' impending interest rate hike are likely to be far more influential.

Historically, a better showing by the ruling People's Action Party (PAP) in the polls has been correlated with a boost in the bluechip Straits Times Index (STI) over the following month, market watchers said. However, they added that the figures available were not enough to indicate any clear trend.

UBS Wealth Management regional chief investment officer Kelvin Tay noted that in the January 1997 elections, the PAP's share of the popular vote climbed to 65 per cent from 61 per cent in the prior election and the STI subsequently rose 3.2 per cent in the one-month period after. That happened again in November 2001 - when the PAP's vote share jumped to 75.3 per cent, the STI shot up 10.3 per cent over the following month.

However, he said that more data would be needed to determine whether this was more than just coincidental. "We only have available data since the 1988 elections to be able to discern this pattern. Data before that period is not robust enough. Also, do note that the returns post the one-month period are largely unnoticeable."

OCBC Investment Research head Carmen Lee said that due to its relatively small size, the Singapore stock market tends to be affected more by global conditions than local events.

The local bourse's total market capitalisation was S$853.6 billion at the end of August.

"Factors such as the fluctuations in the China equities market and fears of rising interest rates are more likely to affect the local market in the near future," Ms Lee said.

A report by Bank of America Merrill Lynch back in 2011 did find a statistical correlation between the STI's performance a month after elections and the swing in the PAP's votes from the previous round. However, market watchers have pointed out that one month was long enough for other events elsewhere in the world to have moved local shares.

For instance, the November 2001 GE occurred two months after the 9/11 terrorist attacks in the US and towering debt problems in Argentina, which led to a contraction in the US economy. The subsequent rally in the STI could have just been part of a rebound from the 9/11 selloff, analysts noted. As for the May 2006 GE, issues at the time that could have dampened the benchmark index included concerns over corporate earnings.

The correlation between the PAP's vote share swing and the STI's performance also seems to be absent for the May 2011 election. Though the PAP's vote share declined to 60.1 per cent, the STI was largely flat over the subsequent month with a marginal 0.5 per cent gain.

DBS Equity Research said in a Monday report that the local market "remains fragile and susceptible to macro events unfolding over the next two months", adding that it now expects corporate earnings for the STI component stocks to fall one per cent this year and that the STI will trade within the 2,750 to 3,050 range over the next few months.

The index could take a further hit from negative shocks such as a US Federal Reserve rate hike in September rather than in December, a sharp slowdown in China's economic growth and a plunge in property prices in Singapore on the back of an interest rate spike, it added.

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