Election years doom for KOSPI, boon to Dow

By Kim Da-ye

After a year of disappointment, markets desperately hope for a recovery in 2012 if uncertainties over the European debt crisis become resolved and the U.S. economy picks up.

Fear for the rest of the year still remains. At the center of the anxiety are a series of elections across the world.

Korea will host a general election in April and a presidential election in December while the U.S. has already embarked on a long journey toward its presidential election in November.

Despite expectations over policies to boost the economy before elections, stock markets did not perform brilliantly in election years in Korea.

Since the 1990s, the benchmark KOSPI dropped in five out of the eight years that had large-scale elections.

Regardless of the odds, the domestic political trend concerns some analysts.

“Attention moved fast from labor to companies after the Asian and Global financial crises. Before elections, policies are likely to focus on households rather than companies,” Kim Hak-kyun, an analyst of Daewoo Securities, said in a report.

“Welfare is already a hot topic in the political scene. Tax cuts, the incumbent government’s major commitment, has also faced resistance. These elements aren’t favorable toward shareholders.”

Hong Jung-hye, a fixed income analyst at Shinyoung Securities, recently published a detailed report on the impact of general and presidential elections on the Korean economy.

Hong first identified the money market as the most affected portion of the economy.

She says that data collected since 1960 show that the amount of money in circulation — M2 used here which includes cash, deposits that can be withdrawn anytime and time-related deposits — grew drastically in presidential election years compared to years without elections. In years that elected both presidents and members of the National Assembly, the amount increased even further.

The analyst discovered that people borrowed more in election years, especially before the presidential election, while the growth in demand deposit and short-term fixed deposits slowed down. As a result, banks may experience a lack of liquidity, she warned.

The analysis of the data also showed inflation intensifying in election years and the gross domestic product (GDP) rising by more than the usual level. Incidentally, M2 is a key economic indicator in forecasting inflation.

Hong said that such tendencies will be inevitable this year because of expenses for election campaigns. Major economies including the U.S. and France may find it difficult to cut their budget because of campaign expenses, so the worldwide inflation wouldnslow down as much as the market expects, making President Lee Myung-bak’s goal to stabilize consumer prices difficult to achieve, Hong said.

This year, Taiwan and Finland are scheduled to vote this month, Russia in March, France in April, Mexico in July and Canada in October. China is expected to have a leadership change in October with Vice President Xi Jinping replacing President Hu Jintao.

In terms of the stock market, Hong found that KOSPI rose 16.8 percent on the average year-on-year in presidential election years between 1982 and the present and dropped 1.3 percent in general election years. Korean stocks gained 22.3 percent on the average year-on-year in non-election years.

In the U.S., however, the story is different. In the past, a stock market rally often followed a mid-term election, meaning the second half of a U.S. president’s four-year term performed better than the first half.

Glenn Rufrano, president and CEO of privately-held real estate services firm Cushman & Wakefield, said in an interview that in election years, “everything goes up normally in the U.S.” as people try to look good before the election.

Various statistics show that although stocks gained more in the third year of a presidency than in the fourth, election years still have been favorable toward the markets.

Since 1928, only three years out of 21 election years saw a negative return in the S&P 500 index.

Yale Hirsch, an American stock market data gatherer, even developed a “presidential election cycle theory” that say the third year of a presidency performs the strongest and the election year above average.

Of course, these kinds of analyses suffer from inherent flaws of insufficient data; it is difficult to make out a pattern out of just dozens of numbers.

Lee Jong-woo, the research center head of Solomon Investment & Securities, said that impacts of elections on stock markets, in general, have been diminishing and that the Seoul bourse’s poor performance in election years may be coincidental.

For example, Korea’s economy took a downturn in 1997 amid the Asian financial crisis and in 2002, households defaulted on credit card debts. In those years, the stock market is more likely to have been affected by the economic cycle, not elections, Lee said.

The Korean market could be rather influenced by the U.S. election this year, he said, as he interpreted the U.S. pressure on Iran as President Barack Obama’s attempt to boost the popularity of his administration.

“Tough actions taken overseas tend to boost the approval rating for an incumbent. Pressing Iran may be Obama’s ace in the hole, but that could hurt other countries’ markets with soaring oil prices,” Lee said.

In the U.S., researches have shown impacts of elections on different sectors of the stock market because of clear differences in policies promoted by the Republicans and the Democrats.

While Daishin Securities identified the retail sector as a victim in an election year because of the government trying to restrict large retailers from aggressive expansions thus hurting their profits, Lee of Solomon said that Korean political parties’ lack of identity would leave most sectors unaffected.

He lamented the recent popularity of “politician theme stocks” — a group of stocks that are believed to be linked to certain presidential candidates and gained massively for no clear reasons.

For instance, oxidized steel maker EG saw its stock price jumping from 26,300 won on Dec. 1, 2011, to 53,200 won on Jan. 12 because Park Ji-man, a younger brother of Park Geun-hye, the presidential front-runner of the ruling Grand National Party, is the firm’s major shareholder. The stock price peaked at 80,700 won on Jan. 4, but slid down rapidly following an industry-wide crackdown on such stocks.

AhnLab, founded by Ahn Cheol-soo, an entrepreneur and a possible presidential candidate, has also continued the rally — the stock price nearly quadrupled after Ahn hinted at running for Seoul mayor in September.

“Because parties fail to show political differences, investors are focusing on personal qualities of candidates. Immense interests in politician theme stocks is very elementary and primitive of the market,” Lee said.