WHY INVESTORS ARE UNWISE TO BET ON ELECTIONS / THE ECONOMIST

Why investors are unwise to bet on elections

Turning a profit from political news is a lot harder than it looks

To meet the world’s biggest news junkies, head not to Washington or Westminster. 

Instead, make your way to a trading floor, where information from every corner of the globe must be parsed the instant it emerges. 

Whatever the news, from coups to company-earnings reports, it probably affects the price of something. 

This year, amid a seemingly never-ending series of elections, the addicts are not short of a fix. 

Electorates representing most of the world’s population are heading to polling booths, and not just market-makers but investors everywhere face the tantalising prospect of trading on the results.

The rewards of doing so successfully are difficult to ignore, since an incoming government has a huge capacity to influence investors’ returns. 

Its fiscal decisions will alter the course of sovereign-bond yields, company profits and foreign-exchange rates. 

Subsidies, tariffs and regulation will determine which industries get a boost and which are knocked for six. 

Less tangible, if no less important, the vibes that a new administration gives off concerning trade, cross-border investment and commerce in general will help decide whether foreign capital floods in or beats a quiet retreat. 

It all hits the bottom line.

This is where even the most ardent armchair politico should pause, take a breath and perhaps follow it with a cold shower. 

Elections offer endless streams of data (in the form of polls and betting odds) as well as constant twists and turns (a shock coalition in India; a candidate’s withdrawal in America). 

They are like catnip to investors, while also burdening their portfolios with real risks. 

Still, the temptation of trying to make a quick buck from politics should be resisted. 

For most, it is simply too hard.

To see why, return to that trading floor. 

You might indeed have identified that a political development—a snap election in Britain, a president haemorrhaging support in America, a poll suggesting France’s parliament might fall to the far right—is likely to affect asset prices. 

But the traders and their algos will have got there first. 

By the time you have placed your bet that a battered currency will recover, a yield curve will steepen or a bond spread will widen, most of the move will already have happened and the lion’s share of your profits will have already gone.

Suppose you booked your trade in time for the juice to still be worth the squeeze. 

Perhaps it was the night of June 27th and Donald Trump had just trounced Joe Biden in a televised debate. 

You decided deficit-funded tax cuts under Mr Trump’s presidency had just become more likely, which, all else being equal, would push up Treasury yields. 

And you were right: by July 1st the ten-year Treasury yield had risen by nearly 20 basis points. 

But all else is never equal. 

Over the next couple of weeks, even as Mr Trump’s chances looked as strong as ever, weak employment figures and surprisingly cool inflation data would have brought yields back down and then some, putting your trade into the red. 

You would have made the right political call, and other factors would have swamped its consequences.

Even that assumes you correctly judged the implications of the news in the first place. 

In practice, knock-on effects on asset prices that might seem obvious at first can often be argued both ways. Immediately after Narendra Modi, India’s prime minister, lost his parliamentary majority in June, Indian stocks tanked. 

Whatever it was that investors feared, they swiftly changed their minds. 

After falling by 6% on the day of the election result, India’s benchmark index duly recovered its losses within the week and then continued to climb.

This summer’s “Trump trades” may well end up looking similarly shaky, even if Mr Trump does return to the White House. 

The classic argument is that a promised 60% tariff on Chinese goods, plus a blanket 10% on those from elsewhere, would fuel inflation and higher bond yields. 

Yet the opposite might also be true. 

Should such tariffs trigger a tit-for-tat retaliation, the ensuing instability and shock to growth could well enhance Treasuries’ safe-haven appeal, ultimately lowering yields.

For a certain type of investor, this very unpredictability is the whole point of betting on anything: bearing risk is precisely what creates the potential for outperformance. 

Perhaps. 

But deliberate exposure to this sort of radical uncertainty is a far cry from most people’s investment strategy. 

News junkies should enjoy this year’s electoral drama to their hearts’ content—and keep their trading apps firmly closed.