[THE VIEW]Stock Investing Amid Election Uncertainty

Rather Than Focusing on Asset Price Fluctuations,
It Is More Effective to Examine Economic Indicators

Not only South Korea, which is approaching a general election, but many countries around the world are holding important elections this year. Considering that economics originated from political economy, politics and economics are inevitably very closely connected. So, how exactly do elections affect the economy?

First of all, the election results determine who will implement what policies, but before the election, there is often uncertainty about the outcome. Due to this uncertainty, companies tend to be reluctant to make new investments before elections and often postpone investment decisions until after the election. A study examining the results of 248 elections in 48 countries from 1980 to 2005 found that corporate investment in election years decreased by an average of 4.8%. It was also confirmed that the closer the election was, the greater the reduction in corporate investment, especially in politically sensitive industries such as pharmaceuticals, healthcare, defense, and telecommunications, where companies made more restrained investment decisions.

The contraction of the real economy naturally affects the financial economy as well. Similar to the real economy, uncertainty in financial markets increases before elections, leading to phenomena such as sharp asset price movements or an overall increase in volatility. The instability of investor sentiment also contributes to greater volatility in financial markets.

Uncertainty caused by elections is inevitably resolved afterward. An analysis of the period around the U.S. midterm elections (elections held between presidential elections to select all members of the House of Representatives and one-third of the Senate) shows that after the elections, stock prices rise, capital flows into mutual funds, and corporate investments increase. These outcomes are all interpreted as results of the resolution of uncertainty.

So, how should investors respond? From a long-term investment perspective, it remains effective and the best way to predict the stock market to focus on overall economic trends and economic indicators such as inflation trends rather than on election-related uncertainty or asset price fluctuations during election seasons.

Research from the U.S. shows that which party controls the White House or Congress is not significantly important, and since uncertainty is resolved after elections, investing after the election to avoid uncertainty can also be an investment strategy. Nevertheless, since volatility remains high for about a week after the election, risk-averse investors may find it advisable to diversify their investments or invest in low-risk assets during the short period before and after the election.

Of course, the recent stock market has been thriving despite the negative issue of political uncertainty. Looking into the reasons, it appears that the performance of some companies and positive market sentiment are driving the bullish market. The sentiment that it does not matter much who wins the election also seems to be at play.

Short-term investment during election seasons requires careful attention to sudden price fluctuations due to the persistent uncertainty. Recently, not only in South Korea but also in countries like the U.S., theme stocks related to specific politicians or issues have become popular. However, such stocks or funds involve significant price volatility and uncertainty, so caution is necessary when investing.

Park Sung-kyu, Professor at Willamette University, USA

This content was produced with the assistance of AI translation services.