Why election cycles matter for financial markets

According to multi-trader Bernd Skorupinski, the CEO of Online Trading Campus, more listings and liquidity seen now are signs that the local market is starting to bounce back, but traders and individual investors will need to capitalize on presidential election cycles such as the upcoming US elections to make clever financial estimates.

The election cycle theory is predicated on the view that shifts in presidential priorities are a primary influence on the stock market.

The theory suggests that markets perform best in the second half of a presidential term when the sitting president tries to boost the economy to get re-elected.

Further, online data from the past several decades seem to support the idea of a stock surge during the second half of a presidential term, although the limited sample size makes it difficult to draw definitive conclusions.

Further, according to the Dubai-based Skorupinski, a full–time trader who specialises in forex, futures and stocks among other alternative investments, will include obtaining relevant information and fitting skills for aspiring financial market traders “before they can jump into the market.”

“One of the greatest challenges in developing countries such as Kenya is the lack of capital to participate in the financial market…but I also think potential traders need to have develop skills before they jump into the market and they can do this through a demo account to avoid making a loss,” advised Skorupinski during a media roundtable in Nairobi on Thursday.

A demo account is a type of account offered by brokers to simulate the real market environment on their trading platform. The biggest difference is that instead of trading with real money, virtual funds are used.

A trader can therefore not lose any real money when using a demo account.

This comes amid a growing and significant surge in online Forex trading not only in Africa but also in Kenya – providing a new avenue for economic empowerment among citizens.

This has been made possible due to the accessibility of the internet and technological advancements, according to Jesse Ogola – a senior account manager at FX Pesa, which he says has allowed Kenyan traders to participate in the global financial markets, contributing to personal and national economic growth. FX Pesa is a trading name of EGM Securities, which is part of the global Equiti Group.

“In the last few years since 2014 we have seen a lot of interest in the financial markets owing to an increase in the financial literacy programs being championed by FX Pesa for instance. I could also equate this to the existing proper regulations by the Capital Markets Authority (CMA),” said Ogola.

Indeed, historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies in the asset class mix.

Investment assets include both tangible and intangible instruments that investors buy and sell for the purposes of generating additional income, on either a short- or long-term basis.

But despite notable advancements made thus far, there are many obstacles that still inhibit the growth of stock markets in Africa.

Except for the JSE, the continent’s biggest in terms of the number of listed companies and market value, African stock markets are still small and often dominated by a handful of large corporations. For example, the conglomerate Dangote Group makes up about 30 per cent of the Nigerian Stock Exchange.

Trading in shares is less frequent, and when it happens, it is usually limited to a few firms.

Closer home, Kenya’s financial sector is ranked the third-largest in sub-Saharan Africa and it makes a significant contribution to economic growth and job creation.