Prospect of poll-driven boost to shares tempered by underlying fundamentals

The general election will be held on March 24. It seems to coincide with upbeat expectations for the economy as revealed in a recent NIDA poll that found almost 70 per cent of more than 1,200 respondents believed that their well-being will improve after the election. This was also consistent with the elevated consumer confidence index during the month of the past election.
However, when we consider the economic performance – such as GDP growth, private consumption and investment, before and after an election - the differences were negligible. This was understandable since once the policies were conceived, it took time for policies to be implemented and show tangible results, especially the ones aiming at enhancing human productivity, such as education. Even though Thailand still has plenty of fiscal space, we have limited resources. Hence, they should be allocated in such a way that long-term growth and prosperity is ensured.
Even though the actual benefits to the economy are longer-term and dependent on policies of each government, investors’ reactions in financial market are often immediate. The financial market can be quite responsive to elections as investors speculate on satisfactory outcomes in the future. Hence, investors may increase their investment, which drives up the prices of these assets. 
If we consider returns on the SET Index, before and after elections, we will see that the returns were significantly boosted after almost every election in the past 20 years. 
On average, 30 days before election dates, SET Index returns increased by only 0.8 per cent as investors indicated concerns about political uncertainties - especially worries regarding the policies of the new government. However, the SET reclaimed its gains as the uncertainties subsided. Thirty days after elections, the SET Index gained by almost 7 per cent. 
Though the gains seem temporary because 60 days after the election, monthly returns were back to around zero per cent close to pre-election level. SET Index movements were dominated by market sentiment.
So, it may be true that the election will drive Thai stock market returns up. However, this is not the case for every financial asset. Some are driven mostly by fundamental factors. Take the baht as an example. 
Strong gains on the baht seemed to emerge after the elections. However, if we compared returns before and after the elections, which were held during large current account surplus, ie, from 2006 to 2014, the return before and after the election was zero per cent against 1.4 per cent, contrasting to2 per cent against minus-0.1 per cent during periods with current account deficit, i.e. in 2001.
It is undeniable that the main driving factors of the stronger baht were, in fact, the fundamental factors. The current account balance is expected to abate from last year due to tepid exports induced by trade war as well as import expansion led by robust investment. 
As a result, even though the upcoming election can boost investment sentiment and foreign fund inflows, the gain from the baht could be limited. 
In conclusion, stronger fluctuation of financial assets could happen during the upcoming election. It is not unreasonable to speculate on these assets to make profit. However, investors should keep in mind that these assets are influenced by not only the market sentiment, but also their underlying fundamentals.

Contributed by DUANGRAT PRAJAKSILPTHAI and SIWAT NAKMAi: [email protected]. Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives.