With the Brexit referendum just 48 hours away, the Spanish election on Sunday, the Aussie election less than two weeks away and the Trump/Clinton showdown next cab off the rank, there has rarely been so much financial market attention on polls
But, listening to the polls when making serious decisions like investing is like believing the weather forecast from the umbrella salesman. While elections are not based on fundamental analysis like other investment market drivers, there are smarter sources of information to help make decisions.
Bookies, or these days, online betting sites, have historically been a far more sensible gauge of the odds on an election outcome. To understand why, consider the economic motivations of both parties:
- Pollsters make money when their polls get published, and “it’s not going to be close” doesn’t sell newspapers, anywhere near as much as “neck and neck” results. That means pollsters are motivated to sway their sample populations surveyed toward the parts of the population most likely to give the “neck and neck” answer. Statistically valid within their parameters, but still biased enough to be dangerous for use by investors.
- On the other hand, bookies could not be more motivated to get the odds right. They have their money literally where their mouths are. They have to stay up to date with market information, and they receive live feedback from the market every time somebody bets. In fact, in-country betters are also voters, so there is quite a bit of inside information coming through in their betting activity too.
History supports the bookies
A professor from the Nottingham Business School who specialises in gambling and political forecasting, Leighton Williams, found that in the years before opinion polls, the bookies only got the US presidential election wrong once in 72 years. Then with the invention of opinion polls and then the digital information age, the accuracy of bookies has improved even further.
In fact, in a University of Texas study, the researchers found that opinion polls got less accurate as the years went by. In the 2004 US presidential election, in which George W Bush Jr defeated John Kerry, the bookies correctly picked the result in every single state while some polls, including FOX, were still picking a Kerry win the day before the election.
In Australia, in the lead up to the 2013 election, at no point did the bookies ever favour Labour. In fact the lowest odds they reached was $2.70, or a 37% probability. Yet opinion polls showed up to a 54.5% two-party preferred result in the months leading up to the election. The result of course was one of the worst in ALP history. One of the betting agencies accurately predicted 91% of the seats, whereas the best result for the pollsters was 70% with the others even lower.
Implications for investors in 2016
So, that brings us to 2016 and the three important elections impacting Australian investors. Here is what the two sources of data tell us today:
|Betting odds (return on $1, and implied probability)
|Brexit (June 23)
|Times: 51% favour leave
Daily Telegraph: 54% favour stay
FT poll of polls: 46% each (18% undecided)
|$4.00 for "leave (the EU)" (25%)
|Australian Federal Election (July 2)
|Newspoll: 50% each on TPP
Morgan: 51.5% to ALP
|$6.05 for ALP (16%)
|US Presidential Election (November 8)
|RCP poll of polls: 52.5% to Clinton
|$3.50 for Trump (29%)
What you do with this then comes down to your view of the implications for markets. As previously written in The Wire, here are my views:
Markets favour certainty and so would prefer “Remain” to win on Thursday. The GBP has already started to strengthen as the uncertainty dissipates with the Remain result expected. There is still a chance of a “Leave” result with a significant number of voters apparently still undecided according to the polls, but it would appear that financial markets are now adjusting to a Remain victory and so the opportunity to profit from the volatility appears to have passed.
Australian Federal Election
At the moment, markets are pricing in a Coalition victory, with little discounting for uncertainty. If the election result drew closer (again, look to the bookies to guide you on that measure), the AUD could fall due to the uncertainty. If anything, markets would be slightly concerned about the ALP’s spending promises and their impact on Australia’s credit rating. But, the reality of politics in Australia is that they have little impact if any on financial markets once the volatility surrounding uncertainty passes.
Bottom line: Nothing to gain for investors here; stick to the fundamental view driving the AUD, that is lower rates and lower AUD in my view.
US Presidential Election
Trump swings from gaining on Clinton to repelling voters, and back again. Each time this has happened the odds of a Trump victory have edged closer, getting as high as 34% according to US bookmakers. For investors, this uncertainty will create volatility. This won’t just be in financial markets, but the real economy will show signs of stress heading to November, likely showing up with slower jobs growth, weakness in confidence and lower business investment. On the other hand, if Trump continues to lose momentum, uncertainty will fall and the US economic recovery will continue unharmed.
After November, a Trump victory would mean more uncertainty simply because of the market’s wariness about what decisions he will try to make particularly on the foreign policy front. While the US economy has been left relatively untouched by the political cycle, there are many that believe that his tax and trade policies could result in rising fiscal debt and inflation respectively, resulting in declining credit quality of the US and higher interest rates simultaneously.
Much as there has been with Brexit, there will be volatility the closer Trump is perceived to get to the White House. Financial markets are not immune to the uncertainty promoted by opinion polls and the media, and so the astute investor should watch for opportunities to buy into the USD on any weakness caused by this uncertainty. The fundamentals of the US economy are very strong relative to the rest of the world, so this augers well for the USD, particularly without Trump’s more radical policies to disrupt the current recovery.