The GE and the market: possible scenarios
HOW might the stock market react to the results of Friday's General Election? Would it fall if the Opposition won more seats? Or would a resounding victory for the governing party set off a rally?
Probably neither. The local market is typically not as dependent on domestic factors as it is on external developments and as things stand now, there are two big worries on the latter front - China's slowing economy-cum-crashing stock market, and the question of when US interest rates will rise.
Furthermore, past GEs have not had much impact on the market, so short of a huge upset which would then mean we'd have entered uncharted territory, there's no reason to expect this time to be different.
If the market does plunge any time over the next week, it's more likely to be because of volatility and weakness in China and the US than anything else.
As this article is being written on Thursday, an overnight plunge on Wall Street and renewed weakness in China and Hong Kong's markets are sending the Straits Times Index sliding, immediately after an encouragingly large bounce on Wednesday. The reason was renewed US interest rate worries after the release of a robust jobs report, which overshadowed news from China suggesting that further government stimulus could be in the offing.
Investors should also bear in mind that the Federal Open Market Committee meets next Wednesday and Thursday and that this meeting is followed by an economic presentation and press conference. This means that some guidance would likely be issued on the direction of US interest rates, so there will be plenty of caution in the first half of the week.
However, a few observations are necessary. First, markets favour continuity and certainty, and dislike the unexpected. Phrased differently, investors prefer the devil they know rather than the devil they don't know, so if something were to happen that throws a big spanner in the works, then there could be added nervousness to that which is already present in abundance.
Second, if the ruling People's Action Party (PAP) retains control but sees a significant drop in its share of the majority vote from 2011's 60.1 per cent, investors might start to ponder the consequences. For instance, would it prod the PAP to adopt more populist, left-wing policies to win votes back? If yes, what might this mean for businesses, corporate taxes and personal consumption?
As voters, investors would welcome higher social spending, especially for the benefit of the less privileged and low-income groups.
However, in the cut-throat, cold-blooded world of equities, people may not be so magnanimous - instead, the preference is usually for more business-friendly expenditures and lower corporate tax (on Wednesday, Japan announced a company tax cut that helped propel the Nikkei 7.7 per cent up, its best one-day showing in seven years).
There is also the question of the impact of adopting more populist measures on the workforce. Small and medium enterprises are already struggling with a labour crunch caused by existing curbs on foreign workers. If more such curbs are installed, and given that productivity takes time to be raised, growth here could suffer.
Having said that, our guess is that after an initial wobble or two, electoral considerations would cease to occupy the market's mind. The strength or lack thereof of the domestic economy is rarely a major market-moving consideration - much more influential are external factors like China and US interest rates.
It is also worth mentioning that the local market - in line with others in the region, with the exception of Hong Kong - has been in the doldrums for more than a year now for reasons too numerous to detail here.
Suffice it to say that irrespective of the election outcome, there should be no letup in the drive to raise the market's liquidity, quality of offerings and standard of governance. Although stock markets globally appear to be developing into homogenous entities over time with the same offerings and strategies, there is still plenty of scope for differentiation.
In the case of the Singapore market, it has carved out a niche as a top-class listing arena for Reits (real estate investment trusts) and as a market that emphasises governance and strong disclosure to ensure a high standard of investor protection. The authorities should continue their efforts to cement the market's reputation on these fronts, no matter what the GE produces.
