Markets and elections: it’s all already in the price

By: Chris Eddy, Head of Investments at 10X

With the election looming, alarming headlines can evoke emotional responses that prompt us to question how our investments, such as our retirement savings, are positioned. When it comes to investing, however, it rarely pays to act on news already publicly available – the markets are just too smart for that. 

Asset prices – be it shares, bonds, property, currency or commodities – are forward-looking. They reflect all known information, as well as collective expectations and risks (on the up and the down) of all investors. It’s new information that moves markets, not what’s already known. By implication, the current market price of any asset is fair given the current risks, and there is no advantage to be had by studying existing information. 

Overall, the level of skill in the market is higher than ever, with countless experts using similar techniques to analyse breaking news and financial information as it becomes available via Bloomberg terminals. By implication, the relative level of skill between market participants is at an all-time low. There is not much of a gap in skill between the best and the worst market participants, which means that luck – as opposed to skill – is the differentiating factor.        

The market is a large, finely calibrated machine being fed information as it becomes available. All new information is discounted, or priced in, almost immediately. Stock prices are said to move randomly, not because prices move erratically, but because new information arrives in a random or unpredictable fashion.

If the ‘news’ lines up with expectations, it cannot be classified as ‘new’ information (even if some hear it for the first time). Rather it is ‘old’ information, already discounted in the price. This nuance can catch out armchair investors who may trade on such news – for example, a big jump in reported earnings – unaware that this is what the market had expected. 

To take a calculated bet against the current price of a financial asset, the investor must understand what information is already discounted by the current price. They must believe they are right and the market (ie everyone else) is wrong. That’s possible, but not very probable. 

The likely outcome of the May 8 elections is that the ANC will stay in power, but with a smaller majority. This has already been discounted by bond, currency and share markets. 

The beneficiary of the ANC’s reduced majority is likely to be the EFF, indicative that more voters see it as a viable alternative to ANC’s corruption and incompetence, or, more likely, because its populist policies resonate with them. 

If there is an even sharper shift to the left, investors are likely to be unnerved, in terms of the long-term direction of our politics, and what the reaction will be from Moody’s, the rating agency that decides whether we keep our investment grade rating or not. We should then expect a negative response in bonds and the rand.   

Alternatively, a stronger-than-expected showing by the ANC could be seen as an endorsement of President Cyril Ramaphosa’s anti-corruption stance, and his more investor-friendly rhetoric and turnaround plan for the country. Such an outcome might boost sentiment. 

None of these considerations are unique, however. You could position your portfolio based on your beliefs (or deep insights). But know that the market has already contemplated all of the potential outcomes of this election, and priced in the most probable one. 

So, unless you see something that no one else sees, or you have seen the future, changing your portfolio now will be an act of speculation rather than investing. Of course, speculators do hit the jackpot every now and again, but if that is what you want to with your money, why not rather go to the casino?

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