Capital formation gets bloated during an election year which invariably tends to spur capital markets.
This is the reason that most stockbrokers and investors are looking forward to an election, analysts say. President Maithripala Sirisena has announced that presidential elections will be held around December 7-9, this year.
“An election itself becomes an economic activity. It is very true for the presidential election because it is an island-wide one,” Dimantha Mathew, Head of Research at First Capital noted to the Business Times.
He said the money circulation before the election will stimulate the economy. “This, in turn, will drive positive sentiments to the stock market.” This would lead to a surge in the indices, he added.
According to Mr. Mathew, the macro fundamentals in the country have improved pretty much compared to the same period last year. “The currency is stable, foreign reserves are good and we have a balance of trade that is positive.” However, the stock market indices are at historical lows. This, according to Mr. Mathew is the lack of money circulation which will ultimately improve before and after an election.
He further added that consumer expectations are also more upbeat during election years, which could indirectly spur domestic demand. This will drive retailers to the Colombo Stock Exchange (CSE), according to him.
An economic analyst agreed saying that an election causes the intermittent rise in the production and consumption of certain commodities like alcohol, meat, fuel among others. Most election-year boosts come from rushed consumption with swelling in capital formation typically in the first two quarters ahead of the polls, the analyst said noting that incumbent politicians cause temporary economic expansions before the elections.
According to him, before an election consumer confidence is said to have a high correlation to general economic growth, as its route often trails economic expansion. This will route retail interest in the CSE, he added. Another analyst confirmed this noting that businessmen inject funds to illegally financed political campaigns and massive campaign ad spending. “Also some of the money stashed away abroad is brought back to fund election campaigns which will ‘temporarily’ boost economic indicators.”
Also (while we don’t have) the eye-popping statistics on the ballooning spending candidates will do, one can try to digest the aggregate numbers by watching TV ads that will be doing the rounds. “They will be trying to match each other in the buying of media space,” the second analyst added.
The election-related costs, including for campaigns, polls management, and development, and current spending, are likely to add plenty of money into the economy which in turn will infuse the CSE with some positive retailer sentiment which it desperately needs, he said.
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