As Australians prepare to head to the polls in the coming months, investor uncertainty is once again in focus. While no official date has been set, the election must be held by May 17, with many experts predicting a mid-April poll.

Elections are often perceived as a source of market volatility. However, historical data suggests this concern may be overstated. Over the past 35 years, Australia has held 12 federal elections, during which the domestic equity market has delivered an average annual return of approximately 9%, with only eight years recording negative returns. Notably, just two of these down years coincided with an election—the early 1990s recession and 2022.

In a surprising trend, election years have historically outperformed. Of the 12 election years, 10 saw positive market performance, with an average return of 14% and a median gain of 13%. With the ASX200 already up between 4% and 5% this year and the potential for interest rate cuts in May and August, 2024 is shaping up to be a typical election year for Australian equities.

Should Investors Wait Until After the Election?

A common question among investors is whether it is prudent to delay market participation until after an election. Historical data suggests that this strategy offers little benefit.

An analysis of the past 12 election cycles shows that, in most cases, markets have performed well in the lead-up to an election. Three-month returns prior to elections averaged 3% (12% annualised), with only three instances (1990, 1998, and 2001) recording negative returns. However, these periods coincided with significant external shocks: the Russian financial crisis in 1998 and the September 11 attacks in 2001. Excluding these anomalies, the average pre-election return rises to 4.5%, with a 90% probability of a positive outcome.

Post-election performance, however, is less consistent. While the average three-month return following an election is 2.2%, markets were negative in six out of the 12 instances. Removing the 2007 election—coinciding with the peak of the global financial crisis—improves the average post-election return to 3.5%. Even in less favourable conditions, the worst performance recorded outside of the 2007/08 crisis was a modest decline of 1.5% during the 1990s recession.

Recent elections further illustrate this trend. In the past four election cycles, markets performed well in the lead-up (rising 10% in 2013, 5% in 2016, 6% in 2019, and remaining flat in 2022) but were more subdued post-election (+0.8%, -0.6%, -0.6%, and -0.1%, respectively).

The Role of the Reserve Bank of Australia (RBA)

Interest rates often feature in election discussions, with speculation on the Reserve Bank of Australia’s influence. However, the RBA operates independently of the electoral cycle. Over the past 12 elections, the central bank has adjusted interest rates eight times—three times during the campaign period and five times near election dates. There is no consistent pattern linking monetary policy changes to election outcomes.

Market Impact of Federal Elections

A recent analysis by investment bank Barrenjoey found that Australian federal elections have minimal, if any, lasting impact on equity market performance, monetary policy, economic conditions, or investor confidence. The study did, however, highlight a tendency for small-cap stocks to outperform large caps post-election. This likely reflects the domestic focus of smaller companies and an election-related uncertainty premium that dissipates once results are known.

Historically, the ASX Small Ordinaries Index has averaged a 6.8% return in election years, aligning closely with its long-term annual average of 6.6%. Even after adjusting for factors such as the economic cycle, government changes, and external shocks (e.g., the pandemic or global financial crisis), there is no statistically significant impact of elections on broader economic conditions or consumer sentiment.

Economic Growth in Election Years

Contrary to the assumption that elections hinder economic growth, data since 1980 suggests that economic growth has typically been stronger in election years than the average across all years. While political commentators will dissect party policies and their potential economic impact, investors may be better served by focusing on long-term market fundamentals rather than short-term political cycles.

Key Investment Considerations

Rather than being distracted by election-driven uncertainty, investors should prioritise factors that exert a more substantial influence on markets, including:

• Corporate earnings and sector fundamentals
• The trajectory of RBA interest rate decisions
• China’s economic outlook and its implications for Australian exports
• Geopolitical factors, such as potential shifts in US trade policy under a new or returning administration

Conclusion

While elections generate headlines and short-term speculation, history suggests they have little lasting impact on Australian equity markets. Investors who remain focused on fundamental drivers—such as monetary policy, corporate performance, and global economic trends—are likely to fare better than those who attempt to time the market based on political events.

Ultimately, these economic and market fundamentals will play a far greater role in shaping investment outcomes than the result of the upcoming federal election.