adminEsther Dzviti Business Analyst
THE equities market traditionally trades bearish in the post-election era as the market waits for the manifestation of the unfolding of political ripple effects on the economy. Economic agents are rational and would obviously ask “how the election affects their finances?” Yale Hirsh’s Presidential Election Cycle Theory is one of the best known stock market performance theories in America. It simply says that stocks decline in the year following an election, regardless of which party wins and improve over the next three years.
The performance of the stock market is influenced by a number of factors, the main ones being the activities of governments and the general performance of the economy. Various studies have examined the performance of stock markets in some countries before and after general elections.
These studies indicate that the stock markets react differently based on the party but markets decline in the year of general elections.
Generally studies show that investors react to changes in the political atmosphere but most studies reveal that whether negative or positive it’s only in the short term until the incoming Government’s policies are predictable to investors for there to be a conclusive trend.
According to a report by the Zimbabwe Economic Policy Analysis and Research Unit, since February 2009, foreign investors have accounted for about 60 percent of funds with locals contributing 40 percent.
During the hyperinflationary period prior to 2009, the ZSE was mainly driven by local investors. For instance, in 2008, foreigners made up only 2 percent of the funds invested on the ZSE.
However, foreign investors commonly withdraw from the local bourse if they have negative perceptions about the economy. When foreign participants start selling, this tends to shake the bourse as was the case in Zimbabwe in the post-election era.
As a result, foreign investors have remained net sellers on the ZSE. Foreign ownership of securities and assets remains controversial.
Some financial experts have pointed out that as a country integrates its financial markets more tightly with world markets, it becomes more and more susceptible to global volatility.
Large cross-border movements of capital invested in portfolio securities, tend to accompany and fuel financial instability
For the ZSE to remain viable and to promote growth, the macro economic conditions should remain stable.
Efforts should be made to maintain the multi-currency system while the economy recovers.
In addition, stable political conditions will remain crucial in enhancing ZSE viability and its ability to mobilise funding. Several specific measures could be considered. There is also the crucial need to promote local institutional investors, with potentially high income levels for investment.
Online Reporter