Next year will be a good year for Asian stock markets if Hillary Clinton wins the U.S. presidential election. If Donald Trump wins (and all else equal), history suggests that a rally in Asia’s markets would need to wait a few years.
Last week, we talked about how the U.S. presidential election cycle affects Asian stock markets. The year before a U.S. election (2015 was the most recent – since this year is an election year) and the year after (which will be 2017) have historically been good years for Asian stock market performance.
Why would American politics influence Asia’s stock markets?
What’s most surprising is that there’s any apparent relationship at all between the American presidential election cycle, and the performance of Asia’s stock markets.
Part of the answer might rest in the small sample size. The indexes that we’re using – and Asia’s stock markets – haven’t been in existence for many four-year American presidential cycles. A small number of data points means that historically unusual returns (like big stock market losses in 2008, or particularly strong years for the stock market) have an outsized impact on average returns.
But that’s only part of the story. Part of the reason may be that global investor sentiment is swayed a lot by what’s happening in American politics – and this may play out in a much larger way on smaller, less liquid markets in Asia (where a smaller absolute amount of funds invested or withdrawn can have a far greater impact than in bigger markets). So positive or negative sentiment in the U.S. with respect to elections might play out in Asian markets more than it does in the U.S.
Democrat or Republican?
For the past century, when Americans vote for president they’ve chosen a candidate from one of the two major political parties – the Democrats or the Republicans. This election, Hillary Clinton is the Democratic party nominee, and Donald Trump is the Republican party nominee.
Since their establishment, Singapore’s and Malaysia’s stock markets have risen a lot more when a Democrat has been president than when a Republican has lived in the American White House.
Singapore’s Straits Times Index (STI) has seen an average return of 13 percent when a Democrat is president. This is almost 4 percentage points higher than the average returns when a Republican is president. (This STI data here differs from the numbers in our previous article about U.S. presidents and Asian markets. That’s because we’ve included returns from the STI’s predecessor, the Straits Times Industrial Index, with data back to 1975.)
Malaysia’s KLCI has seen average returns of over 16 percent when a Democrat is in the White House – almost 10 percentage points more than during a Republican presidency.
(Briefly… the post election year is the first calendar year after the U.S. presidential election, which would be 2017. Midterm is year 2 (2018 in this case); pre-election is year 3 (that is, last year); election is year 4, or this year, during the current election cycle.)
For all the markets we looked at, the post-election year following a Democrat presidential election victory has seen higher than average returns. For the broad MSCI Asia ex Japan Index, the average post-election year return has been 31 percent. For Singapore and Malaysia, it’s been 19 and 25 percent, respectively.
For Hong Kong’s Hang Seng, returns are 17 percentage points higher during a Democrat president’s post-election year.
And for most of the markets we looked at, the post-election year (which will be 2017) is the best performing year of the four-year Democratic presidency term. The only exception is Hong Kong, where the best year has been the election year (which is this year for the current presidential election cycle).
… but Republicans are better for other markets
The MSCI Asia ex Japan Index as a whole – despite Singapore and Malaysia – seems to prefer Republican presidents, though. The average return when there’s a Republican president, at 12 percent, is higher than when a Democrat is president (9 percent).
During the pre-election year, or the third year of a Republican as president, the MSCI Asia ex Japan Index has seen an average return of 35 percent. This is 27 percentage points higher than the pre-election performance during a Democratic presidency.
In fact, when a Republican is president, these same markets have all had outstanding returns during the pre-election year (or 2015 for the current cycle). Singapore has seen average returns of over 27 percent during a Republican pre-election year. Hong Kong has averaged an incredible 40 percent.
Neither of them posted such great returns last year, which broke with tradition.
The only market where the results were roughly similar, regardless of which U.S. political party held power, was Hong Kong.
What the results tell investors
As we explained earlier, the results for Asian markets have a pretty small sample size. For instance, the MSCI Asia ex Japan Index has only seen 7 U.S. presidential election cycles, covering 3 Republican presidents and 4 Democratic presidents. One very good (or bad) year can have a big impact on the overall results. (And we’re only looking at the numbers – not at the policies that might have affected Asia’s economies, or any other factor.)
Despite this, the results do show a clear pattern for the MSCI Asia ex Japan Index, Hong Kong’s Hang Seng, Singapore’s STI and Malaysia’s KLCI: Expect good results the first year (post-election) of a Democratic presidency, and above average performance during the third year of a Republican presidency (the pre-election year).
So, 2017 could be a good year for Asian markets if Hillary Clinton wins the November 8 election. If Donald Trump wins, and barring any policy surprises that could make things difficult for Asia (which we’ve written about here ), get ready for strong market performance in 2019.