‘Just leave it alone’: Why mixing markets and politics is messy

If the surge of interest in stocks by retail investors in North America is a frenzy, then it could be described as a stampede in China.

Individual investors make up a growing percentage of U.S. stock trades and currently account for an estimated 25 per cent. In China, as much as 80 per cent of equity trading is done by retail investors, according to the Organization for Economic Cooperation and Development (OECD). And that number could climb because state-owned media was in stock market cheerleader mode this month.

On Monday, the China Securities Journal — a government-owned equivalent of the Wall Street Journal — ran a front-page editorial suggesting investors are in for a “healthy bull market.” The piece said investors should look forward to the “wealth effect of the capital markets.” 

After publication, social media searches for “how to open a stock account” exploded and the Shanghai Composite climbed nearly 6 per cent to a five-year high. This was on the heels of a similarly encouraging op-ed in sister publication Shanghai Securities on July 3.

Bloomberg reports margin debt has risen at the fastest pace since 2015 and online trading platforms are struggling to keep up. In a little over a week, Chinese equities have outperformed the world, adding more than US$1 trillion of value.

According to Ian Lee, associate professor at the Sprott School of Business, this surge is driven by political influence rather than economic fundamentals. “Profits are doing poorly, the economy has not turned around,” he said. “The whole market is rigged because government involvement is so extensive that it becomes a self-fulfilling prophecy.”

Lee has been teaching executive MBA courses in China annually for more than two decades. He argues the Chinese Communist Party is trying to divert attention from COVID-19 to the stock market. 

“They’re trying to get away from bad international press and appeal to patriotism within China where there is a very significant middle-class now,” he said.

McGill University Associate Professor Sebastien Betermier says he’s alarmed when buying shares is framed as a political statement since that impetus for getting into the market isn’t based on a sound investment strategy.

“I’m afraid when there’s a stampede of novice investors rushing to get in at a time when prices are high and if there’s a dip, they’re going to rush to get out,” Betermier said. “That’s a recipe for disappointment.”

Lee says based on recent history, stock prices that are artificially propped up do eventually fall. “I don’t think the billionaires and millionaires will get burned. It’s the middle and upper-middle class who may be re-mortgaging their condo in downtown Shanghai, treating it as an ATM to speculate in the market.”

Nudges or encouragement to get into the stock market from politicians are rare and have generally not been well received in Canada, where the government approach is more neutral. 

In the Fall of 2008, then-Prime Minister Stephen Harper was lambasted by the opposition for suggesting that investors seek out “buying opportunities” in falling stock markets. The S&P/TSX Composite Index was hovering around 8,500 points at the time, about half of where it is today.

In the U.S., President Donald Trump, unlike his predecessors, has been a cheerleader for equities. On Feb. 24, when the Dow Jones Industrial Average plunged more than 1,000 points, he tweeted that the stock market was “starting to look very good to me!”

He has even repeatedly tied his performance as president to that of equities.

Lee says that political messaging isn’t a good strategy. “Mr. President, if you’re such a brilliant manager of the economy when the stock market goes up, does that mean you’re a terrible economic manager when it goes down as it has?”

This week, Trump tweeted that a Joe Biden victory would be devastating for stocks. He also wrote that a Biden presidency would mean “Massive Tax Hikes” days ahead of his Democratic political opponent’s economic platform. 

Biden has pledged to scrap most of Trump’s 2017 corporate tax cut which observers point to as one of the market’s biggest drivers. On Thursday, Biden accused Trump of being “focused solely” on the stock market rather than the economy as nearly 50 million people have been laid off in the past four months during the coronavirus pandemic.

Analysis by Bank of America shows that stocks generally perform better when an incumbent is re-elected. But Betermier says that equity returns tend to be higher under Democratic presidents than Republican. 

Regardless, Lee says that when buying equities, or the performance of the stock market, is wrapped up in political rhetoric, the outcome is more market fluctuations and distortions.

“Whether it’s [China] President Xi’s minions or Trump, when they engage in the stock market in a partisan way, it creates volatility and markets are volatile enough. They should just leave it alone,” Lee said. “When politicians talk about the stock market specifically, I think it’s fraught with difficulty. It may give false comfort to some of those newbie investors.”

Source: BNN Bloomberg

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