As elections are typically one of the significant risk events for investors, we look at the past five general elections and the performance of the Straits Times Index (STI) to see if there is any impact both before and after the polling date/election result.
In three out of the last five elections, market reaction was fairly subdued. The exceptions were in 2001 and 2006. One month after the elections, the STI rallied 10.6% in 2001 but fell 8% in 2006. What was even more surprising was that the benchmark index actually eked out a 1.5% gain in 2011, where the ruling party put up possibly the worst performance in its electoral history. The main opposition, the Workers Party, managed to secure a Group Representative Constituency (GRC) from the ruling People’s Action Party – the first time in Singapore’s short political history. One would reasonably assume that the markets may not take too kindly to the results, but the muted reaction suggested investors are still confident of Singapore’s political stability.
Furthermore, the outperformance in 2001 as well as underperformance in 2006 may be traced to factors unrelated to politics. For starters, the 2001 elections came a couple of months after the World Trade Centre terrorist attacks which saw global markets falling considerably. In 2006, the three-year bull run prior to the election could have seen strong profit taking following the polls.
Clearly, past performance is not indicative of future performance. Nonetheless, we may have a good idea of what could happen in the coming election in terms of the stock market. This is even more pertinent as this election is likely to be fiercely contested. Given the 2011 results, some may even predict the odds are in favour of having more opposition members in parliament. The Singapore stock market is also facing a greater problem of weak interest and lower trading volumes after a lacklustre period for new public listings.
Meanwhile, OCBC’s earnings for Q2 beat estimates at SGD 1.05 billion, compared to SGD969 million expected. In contrast, UOB missed net income forecasts, coming in at SGD 762 million against SGD 831 million estimated. However, both banks, as well as DBS, should benefit from higher local interest rates. That said, prospects of slower loan growth may limit corporate net interest income.
Overall, the outlook for the local lenders is expected to be a tad brighter, buoyed by hopes the US central bank would announce an interest rate increase in the coming months. Jardine-related entities will be releasing their earnings results today, while next week will see four STI companies (Sembcorp, Capitaland, Starhub and Wilmar) announcing their Q2 profits. However, much of the STI performance today also hinges on the movements in the Chinese equity market.
Expect late-day swings in Chinese stocks
Chinese markets should continue to grind sideways in the coming sessions, as some calm returned to the market. Yesterday’s decline is expected to be tolerated by the authorities, but we could still see state fund bids cushioning the downside today. We have noticed late-day swings in Chinese markets recently, and the Wall Street journal noted it may be due to afternoon margin calls from lenders as well as the presence of state money.
It must be said that the swings may go both ways. Margin calls may add to selling pressure in the afternoon, which would drag equities lower, while state fund buying would push stocks up. Meanwhile, Shanghai Securities News reported the China Insurance Regulatory Commission had asked insurers to avoid net selling of equities.
On the economic front, the Politburo will step up targeted macro policy control to mitigate downward pressure on the economy, according to Xinhua. Beijing is expected to take pre-emptive adjustments and fine-tune economic policies in the second half.