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Capital Clash: Theorising the Impact of the 2024 Presidential Elections on the US Stock Market

July 22, 2024 No Comments

Capital Clash: Theorising the Impact of the 2024 Presidential Elections on the US Stock Market

As the 2024 US presidential election looms, the nation’s stock market faces a turbulent landscape of economic policy promises and electoral uncertainties. With the date set for the 5th of November with Joe Biden and Donald Trump emerging as the top candidates, investors navigate an uncertain terrain where each policy announcement and political shift can sway market dynamics dramatically. The market’s reactions mirror the electorate’s anticipation, with eyes fixed on each candidates’ economic agendas, regulatory plans and their potential impact on economic sectors whose effects are magnified against the vast differences in economic and political philosophy between Democratic and Republican parties. Amidst this volatility, the stock market’s resilience and sensitivity underscore its pivotal role in reflecting and reacting to the evolving political and economic narrative leading up to the election day. The following article deconstructs the theorised public and expert opinions regarding how the US Stock market would shape its volatile response in the days leading up to the 5th of November when the presidential battle would be won and lost and markets would resolve.

Current Insights from the 2024 Presidential Elections

The 2024 elections were officially initiated in mid-January across states such as Iowa, New Hampshire and Nevada where early contests were held up until the 5th of March on which a great number of states held their preliminary elections. The results of these primary elections concluded in determination of the key candidates of the 2024 presidential elections with Donal Trump emerging from the Republican Party and Joe Biden emerging from the Democratic Party. While their campaigns are already underway, it is not until mid-summer after the Presidential Debates during which each party will hold their national conventions and officially nominate its candidates for both presidential and vice-presidential candidates. It is between the national convention and the 5th of November in which campaigning is expected to be at its highest rigour with financial markets reacting dramatically to policy proposal and electoral creating an environment of uncertainty until all results are officially casted and counted and the new administration is inaugurated from the 20th of January 2025 onwards.

The above paragraph only provides a summarised snapshot of the key dates that define the 2024 US presidential election and is devoid of further electoral complexities. Nevertheless, this general overview is key to building our understanding on the current performance on the US stock market using the S&P500 as our proxy. According to LPL Financial analytics, since 1952, the S&P 500 has typically seen average returns of 7% during presidential election years and when the incumbent president seeks re-election, this average usually jumps to 12.2%. This year, however, the index has exceeded these historical averages significantly. The S&P 500 is up 14.6% year-to-date, marking its strongest start to an election year ever recorded by Goldman Sachs which represents a 31% surge from its low point in October 2023. These astronomic returns however are a product of narrow scope of player including firms like NVIDIA and Vistra whose technology blooms have significantly shaped the US stock markets. Nonetheless, equity research analysts the S&P 500 to sustain its bullish behaviour as investors rally in market devoid of the economic uncertainty and geopolitical tensions that loom the US stock market. This optimism is not limitless however given that a high degree of volatility soi expected in October in which analysts predict dramatic changes especially amongst industry-specific indices as each candidate campaigns their sectorial plans for fiscal spending.

Theory 1: The Election-Market Irrelevance Hypothesis

One view that seems to be shared among a minority of analysts is what we coin as the Election-Market Irrelevance Hypothesis. As implied by the name, this theory argues that the performance of US stocks is less likely to vigorously react in response to each candidates’ economic plans. This theory specifically posits that while volatility is expected, stocks are less likely to reach dramatic lows or astronomical highs which has been evinced through the historical performance of US stocks. It has been noted that the S&P 500 has performed well under both administrations during election years, averaging a 10% return since 1957 showing no correlation against proposed election outcomes other than in 2008 in which the US underwent a stagflationary recession.

This theory is also underpinned by the assumption that neither political party has the power to influence stock markets through fiscal propositions. With spending frequently surpassing tax revenues, the US Federal budget has always been at a historic deficit which is often overshadowed by the USA’s growth prospects, international trade and geopolitical disputes. As election campaigns predominantly focus on such fiscal plans, investors are less likely to react vigorously to fresh campaign announcements given that the general expectation is that all plans, irrespective of political party, are expansionary in nature. Alternatively, as of 2024, it is the Federal Bank and its monetary policies that can have a greater impact on the S&P’s behaviours which remains crucial at a time in which several stakeholders are counting on an expansionary monetary policy. In sum, the Federal Reserve’s monetary policy would have a more significant role in influencing stock market performance in 2024 and broader economic conditions than specific fiscal policies that are pitched and enacted by presidential candidates.

Overall, this theory encapsulates some of the essence of the Efficient Market Hypothesis that claims the irrelevance of certain exogenous factors in determining market outcomes entailing that US stock prices are likely to follow a volatile random walk in the days leading up to the 2024 Presidential Elections. According to corporate strategist, Brian Levitt, investors should be less interested in political affaires and more interested in private-sector plans and strategies that are pitched in by corporate leaders such as leveraging AI and proposed mergers and acquisitions which when responded to would yield positive effects on both financial markets and social wellbeing. One of the assumptions that maybe underpinning Levitt’s philosophy is the intuition that the private sector boasts more economic potential that governing bodies in determining economic and social outcomes. However, if investors are to disregard the 2024 Presidential elections and balance their portfolios and investments in accordance to private sector information, we would also have to believe that corporate too are behaving accordingly which is unlikely to be the case in the real world. The theories that follow synchronise more with reality and reflect how the US stock market’s performance maybe indeed relevant to election outcomes and expectations.

Theory 2: The Election-Market Relevance Hypothesis

Despite the logical validity of the Election-Market Irrelevance Hypothesis, some analysts propose a nuanced perspective suggesting that electoral campaigns, polls, and policy proposals do influence investor behaviour and subsequently impact market performance. Psychologically, the media’s role is pivotal; expert analyses of economic plans from presidential candidates like Biden and Trump dominate headlines post-debate, prompting investors to adjust and rebalance portfolios based on which candidate’s policies promise greater economic stimulation. Historically right-wing capitalistic candidates like Donald Trump whose policies centre on business growth, trade and corporate profitability are more likely to yield consistently strong returns through-out the election with some volatility if the probability of his victory is relatively high. Moreover, left-wing democratic candidates like Joe Biden tend to focus on wellbeing-oriented polices that cater less to the interests of corporates leading to poorer or more ambivalent stock market performance during the lections. However, these propositions would only hold true in theory and assumed that every investor perceive each candidate’s fiscal plans to yield the same economic outcome. Pragmatically this is not possible and it is due to this variance in investor opinions about polices that create the volatility of stock markets during election months. A better way to approach the theory would be to trace how stock market behaviour may influence election outcomes that vice versa.

It has been suggested by experts that stock markets behave in a manner that predicts the presidential candidate thus forming a relevant link between elections and market behaviour. The evidence for this claim stems from a Forbes Report that stock market returns have remained an accurate proxy in predicting the presidential winner of an election as illustrated in 87% of the cases since 1928. The main behavioural indication is that a declining stock market signals an incumbent party’s defeat while a rising stock market predict a new candidate’s victory or an incumbent party’s re-election. Interestingly, more specific insights from a T. Rowe Price report found that the year following a Democratic win sees an average market gain of 11.3%, compared to 6.6% after a Republican victory. Applying these general insights to the current S&P performance yields ambiguous results predicting both the victory of Biden and Trump given its all-time strong performance. It is important to note while the empirical findings that support the theory maybe true, the S&P 500 as of now is yet to activate its prediction for the 2024 elections and it would be more relevant to draw such conclusions in October when markets are set to be the most volatile and most indicative of future outcomes. In sum strong performance could predict the victory of challenger, Donald Trump if his prospects and the opposite case if his prospects are low.

Conclusion – Guiding your Election-year Investment Strategy

As the 2024 US presidential election approaches, investors face a landscape of economic uncertainty shaped by policy promises and electoral dynamics. The theories discussed offer contrasting views on the impact of elections on stock market behaviour: the Election-Market Irrelevance Hypothesis suggests that market movements are largely independent of election outcomes, driven more by broader economic factors and monetary policy, while the Election-Market Relevance Hypothesis argues that campaigns and policies can sway investor sentiment and influence market performance.

Given the complexity and unpredictability of electoral cycles, investors are advised to maintain a balanced and diversified portfolio that considers both short-term volatility and long-term growth prospects. While political developments may create market fluctuations, focusing solely on electoral outcomes may overlook fundamental economic drivers and sector-specific opportunities.

In practice, prudent investment strategies should prioritize thorough research into corporate fundamentals, technological innovations, and global economic trends. This approach helps mitigate risks associated with political uncertainty and positions portfolios to capitalize on broader market trends regardless of electoral outcomes.

Ultimately, while elections can introduce short-term market volatility, successful investment strategies rely on a disciplined approach that integrates both macroeconomic analysis and company-specific insights. By navigating these complexities with a focus on long-term value and resilience, investors can navigate election-year uncertainties and pursue sustainable growth in their portfolios.

REFERENCES

Goodkind, N. and Egan, M. (2024) Analysis: The stock market is having its best election year ever | CNN business. Available at: https://edition.cnn.com/2024/06/24/investing/premarket-stocks-trading/index.html (Accessed: 18 July 2024).

2024 election insights (2024) 2024 Election Insights. Available at:https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-themes/us-elections/ (Accessed: 18 July 2024).

Hooper, K. et al. (2024) Could the 2024 US presidential election affect market performance? Available at: https://www.invesco.com/emea/en/insights/market-performance-2024 presidential-election.html (Accessed: 18 July 2024).

Saglimbene, A. (2024) 2024 U.S. elections: What investors need to know. Available at: https://www.ameriprise.com/financial-news-research/insights/2024-presidential-election-market-impact (Accessed: 18 July 2024).

Lampe, A. (2024) What will the stock market do as election nears?, Kiplinger.com. Available at: https://www.kiplinger.com/investing/what-will-stock-market-do-as-election-nears (Accessed: 18 July 2024).

Poullaouec, T. (2024) How do U.S. elections affect stock market performance?: T. Rowe Price, How do U.S. elections affect stock market performance? | T. Rowe Price. Available at: https://www.troweprice.com/financial-intermediary/us/en/insights/articles/2024/q2/how-do-us-elections-affect-stock-market-performance.html (Accessed: 18 July 2024).

Written by: Mineka

My Writing Corner Pulse of the World

An Analysis Into The Reasonings Behind The Macroeconomic Fluctuations In Sri Lanka’s Post Covid Economy

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An Analysis Into The Reasonings Behind The Macroeconomic Fluctuations In Sri Lanka’s Post Covid Economy

The post-Covid Era signals the period that follows the socioeconomic turmoil caused by the COVID-19 pandemic during which economies start to recover and life sets into pre-Covid normalities (WHO, 2021). In Sri Lanka this period is evident following the last economic quarter of 2021 during which the nation unfortunately faced its deepest economic and political crisis triggered mostly by federal economic mismanagement. The following report is therefore centred on economically examining the gravity of this crisis in terms of fluctuating macroeconomic indicators and have their reasons expressed using hypothetical economic models. The report ends with a statistically-proven argument on which macroeconomic objective could have been prioritised in order to optimise success and circumvent calamity.

EVIDENCE OF CHANGES

ANALYSIS OF CHANGES

The fluctuations between the quarters for each indicator can be understood through autonomous reasonings illustrated through hypothetical shifts in aggregate supply or demand.

The post-Covid era has seen severe variability in the unemployment rate with more individuals being laid-off than the natural rate. Industrial experts suggests that post-Covid unemployment is linked with the high prices of imported production inputs due to the high taxes levied on them by the government to battle foreign-exchange shortages. In-fact, this is evident in the national construction industry where 90% of projects are kept on standstill due to insufficient raw materials.

The AD-AS model can aid our understanding of this scenario as government restrictions and taxes have increased production costs thus shifting the SRAS curve to the left causing more workers to get unemployed due to the reduction in production activities by firms as the Real GDP level (Y₁) inches further away from full employment at Y_F.

Economic growth on the other hand has continued to decline and set the nation on a prolonged recession. The government has stated that this contraction was stimulated by high unemployment combined with inflationary pressure that reduced real incomes and curtailed consumer spending. Furthermore, higher interest rates raised borrowing costs and thus dwindled investments by firms and governments to spend more cautiously. As a result, overall spending decreases shrinking financial returns on firms and creating a cyclical cycle of economic declines.

Once again, the AS-AD model vividly exemplifies this scenario with the AD curve shirking to the left representing the reduction in consumer, investment and government spending resulting in an indisputable decrease in Real GDP. This is equivalent to an economic downturn on the economic cycle as it approaches a trough.

Inflation has played a significant role in Sri Lanka’s economic turmoil and has continually increased during the post-Covid era. At a glance, the reasonings behind this can be exemplified by the disruptions caused in global supply chains due to the energy and food crisis caused by the Ukrainian conflict causing import restrictions and higher tax rates. One key change took place with a policy change in 2021 to shift from chemical to organic fertilizers overnight due to forex shortages that entirely disrupted Sri Lanka’s food supply.

According to AS-AD model this policy created a supply shock in the agricultural industry that resulted in essential food products like fresh produce being extremely scarce thus raising their prices. This is an application of cost push inflation but paired with the effect of reduced unemployment this could be classified as stagflation. As a result, the entire aggregate-supply curve would have shifted to the left resulting in the severe inflationary pressures Sri Lanka saw in 2022.

Poor external stability is at the core of Sri Lanka’s economic turmoil with foreign debt accumulating a great share of GDP. This is because Sri Lanka has historically imported and borrowed more than what it has earned through exports with tourism revenue greatly falling due to the pandemic. In addition, the poor expansionary policies of the government back in 2019 which included low interest rates and taxes would have further pushed import spendings and drained more foreign reserves. Gradually as Sri Lanka hit the economic turmoil of 2022, foreign reserves were at an absolute minimum causing countless other decisions to be made so the government can pay its current and past debt obligations and spend on essential imports reducing Sri Lanka’s external stability. While in-crisis, the government chose to borrow more in the form of currency swaps and loans from neighbouring countries which further increase the debt-to-GDP ratio.

STATISTICAL INTERCONNECTEDNESS BETWEEN INIDATORS AND CONCLUSION

A recurring reason behind the economic calamity that Sri Lanka faced in 2022 as mentioned multiple times in this analysis is the falling forex reserves which shows a sharp decline over the post-Covid period correlating well with the worsening trends of other indicators like economic growth, unemployment and inflation. Forex reserves like debt ratios signify a nation’s external stability as it acts as a liquid asset representing the confidence and ease at which a nation can repay its debt obligations and procure essential imports and raw materials for production and consumption activities.

Due to mismanagement and faulty policies, Sri Lanka has indisputably grappled a forex shortage throughout this period which is why firms had to close down production processes due to insufficient inputs contracting the economy with a variation of 78.8% explicable through this phenomenon as evident through regression analysis.

Economic contraction (GDP Degrowth) and falling production levels have simultaneously led to high unemployment with 70.4% of the variation in unemployment explicable through the variation in GDP degrowth. This was because as aggregate supply fell alongside lower spending levels meaning firms had to lay-off workers to compensate the loss in production requirements.

Finally, as the effect of reducing aggregate supply outweighed the decline aggregate demand and workers were laid-off a stagflation like situation was created with a strong 98% of the variation in inflation rates explicable by the economic contraction meaning as the economy contracted, workers were laid-off while firms struggled to produce further prices were put up by firms in order to battles the shortage of goods the country faced.

The above visualisations as reported through the outcomes of regression analysis narrates the story of Sri Lanka’s post covid economic disaster met further with political instability, civilian unrest and increased relative poverty and interconnectedness of various macroeconomic indicators with the initial core reason centred on falling forex reserves. This highlights how Sri Lanka’s inability to manage its external stability is what drove the economic crisis and could have been prioritised form the start in order to avoid this economic calamity.

To counter argue, if Sri Lanka were to prioritise on another objective, say economic growth and reducing unemployment by introducing progressive expansionary policies, firms and consumers would further spend their pockets on imported goods and raw-materials further plummeting forex reserves until they are drained to the extent Sri Lanka may have to declare a full bankruptcy and loose its capability of being a full-functional country.

Therefore, it is indisputable that prioritising external stability as a macroeconomic objective particularly with the availability of forex reserves is crucial particularly in countries like Sri Lanka which depend heavily on foreign debt and essential imports as any shortage can results in essential goods being unavailable within the economy that leads to economic contraction, higher unemployment and poor price stability as illustrated in the case of Sri Lanka.

References

Macroeconomic Chart Pack: Central Bank of Sri Lanka (no date) Macroeconomic Chart Pack | Central Bank of Sri Lanka. Economics Research Department. Available at: https://www.cbsl.gov.lk/en/statistics/economic-indicators/macro-economic-chart-pack (Accessed: April 2, 2023).

What is post-covid-19 era (no date) IGI Global. Available at: https://www.igi-global.com/dictionary/post-covid-19-era/99484 (Accessed: April 1, 2023).

Sri Lanka Foreign Exchange reserves march 2023 data – 2004-2022 historical (no date) Sri Lanka Foreign Exchange Reserves – March 2023 Data – 2004-2022 Historical. Central Bank of Sri Lanka. Available at: https://tradingeconomics.com/sri-lanka/foreign-exchange-reserves?embed%2Fforecast (Accessed: April 2, 2023).

What is post-covid-19 era? – WHO (no date) IGI Global. Available at: https://www.igi-global.com/dictionary/post-covid-19-era/99484 (Accessed: March 29, 2023).

Written by: Mineka

My Writing Corner Pulse of the World

Transformative Trends: New Developments Powering The Sustainable Investing Landscape Down Under

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Transformative Trends: New Developments Powering The Sustainable Investing Landscape Down Under

The 2024 investment landscape of Australia is a product of a multitude of transformative factors, including technological advancements, regulatory conditions, and geopolitical tensions. For investors aiming to capitalise on the untapped opportunities within Australia’s financial markets, a comprehensive understanding of these factors is crucial. According to numerous independent analysts, one trend anticipated to expand in 2024 is sustainable investing, a sector that has recently evolved from a niche to a mainstream market, compelling companies to adopt ESG-oriented policies and decisions that cater to investor demands. Parallel to this trend is the evolving definition of sustainable investing which previously entailed merely investing in companies with strong ESG credentials but encompasses a more holistic approach (Comendador, 2024). Today, investors prioritise organisations with potential rather than just past achievements and are more inclined to scrutinize ESG data in detail before making investment decisions. The following article deconstructs and analyses the key developments shaping Australia’s sustainable investment landscape in 2024, focusing specific attention towards enhanced ESG regulation, the power of generative AI, and calls for a more practical finance education.

Launching the Sustainable Finance Roadmap

The Sustainable Finance Roadmap was a proposal that was previously formulated by the Australian Sustainable Finance Initiative (ASFI) in November 2020 and was focused on transforming the country’s financial systems and markets in a way that helps mobilise funds towards the nation’s growing sustainability needs while also maintaining consistency with global sustainability agendas like the Paris Agreement or the UN’s SDGs (ASFI, 2020). In June 2024, the Australian Government released an updated version of the Sustainable Finance Roadmap, which continues to emphasise the importance of sustainable finance reforms with key priorities including instituting mandatory climate-relating reporting, establishing a sustainable finance taxonomy, and instituting a labelling regime for sustainable investments.

One crucial insight from the road map is the emphasis placed on the Australia Accounting Standards Board (AASB) to finalise its climate reporting standards and disclosures by August 2024 such that they can be implemented on a test group of companies form January 2025 onwards before it is mandated through corporate legislation across all Australian firms that bear public accountability (Segal, 2024). In addition to this, emphasis has also been placed on developing a Sustainable Finance Taxonomy which would provide investors and corporations with a definite set of criteria and algorithms to evaluate a project’s ESG impact and its alignment with global and national sustainability objectives. Through this development the government has also proposed a mandatory labelling system that seeks to flag financial products and instruments according to their sustainability impact that would help streamline the process of selecting investments.

According to the Australian Treasurer, Jim Chalmers, the Roadmap is a crucial framework that would help responsible investors make better and more streamlined decisions regarding sustainable investment thus enhancing the mobilisation of private capital from investors to the nation’s green endeavours with particular emphasis on the renewable energy transformation that aligns well with Australia’s Net Zero goals (Segal, 2024). Moreover, the roadmap is a crucial element to modernising and reducing the inefficiencies inherent in capital markets like asymmetric information. Through mandatory disclosures, formal labelling systems and algorithmic methods developed at the hands of the government, sustainable investors will be devoid from the impacts of ingenuine reporting and unequally shared information which can be now tracked and reported through the legal system. These regulatory changes once implemented will create a new generation of responsible investors who are better capable of mobilising their capital towards productive investments that generate both economic and socio-environmental returns that cater to Australia’s sustainability interests.

Harnessing the Power of Generative AI

Unlike regulatory enforcements and frameworks, one change that is unanimously evolving the global commercial landscape is Generative AI and Australian investors are no exception to harnessing the advanced capabilities that this technology posits in the realm of sustainable investing (Comendador, 2024). Generative AI is a technology born out of advanced machine learning models and neural networks which thereby instil its capabilities in generating human content and mimicking human creativity. IntellectAI is one such tool that has grown in popularity among Australian investors which helps consolidate unstructured ESG data into structured datasets that can be used to derive meaningful insights and perform better sustainability analysis (Jhaxel, 2024). According to the developers of these tools, incorporating AI into ESG analysis enhances data precision and could help investors isolate and identify the most productive sustainable investments.

Tim Mohin, a director at the Boston Consulting Group, states that 40% of the world’s GDP is contingent upon mandatory climate and ESG disclosure as regulatory requirements are reinforced amongst nations similar to Australia’s formalisation of the Sustainable Finance Roadmap (Kell, 2024). One argument posits that this rise in regulation would subsequently drive the market for AI tools that enhances a firm’s ESG tracking mechanisms as tools available at the disposal of investors. One insightful application of AI that would help investors is the detection of washing techniques (eg: greenwashing, pinkwashing) which can be collectively defined as a form of asymmetric information that misleads investors on a corporation’s environmental and social agendas. As these techniques threaten the credibility of sustainability, Generative AI tools can be utilised in uncovering such techniques ensuring investors make well-informed decisions that re devoid from washing. One recent development involved, EY, a prominent auditing and assurance firm, collaborating with several start-ups in designing a “Greenwashing Compass” that allows firms to screen descriptive narratives on their sustainability narratives to detect the likelihood of it being perceived as greenwashing by a human reader (Torsvik, Ellingsen &Vinge, 2023).

Despite the increasing integration of artificial intelligence (AI) into sustainable investing, notable weaknesses and concerns persist that merit careful consideration. A primary issue is the substantial energy consumption of AI-driven data centres, which raises significant sustainability concerns. Tim Mohin from Boston Consulting Group highlights this challenge by noting, “Data centres continue to consume an outsize portion of energy”, a situation that threatens to undermine the very sustainability objectives these technologies are intended to support (Kell, 2024). This paradox of high energy consumption potentially counteracting sustainability goals presents a serious dilemma. Additionally, there are ongoing doubts about the reliability and quality of AI-generated Environmental, Social, and Governance (ESG) analyses. John Friedman, an expert in ESG strategy, stresses the importance of rigorous validation and human oversight to ensure that AI outputs are accurate and dependable. He cautions that investors and companies should not rely solely on AI results without comprehensive testing and validation, underscoring the need for continuous evaluation of AI models with diverse datasets to maintain the integrity of sustainable investment decisions. Addressing these concerns is crucial to ensuring that the advancements in AI within the realm of sustainable investing do not compromise the reliability and efficacy of investment insights.

Educative Developments in Sustainable Investing

As of 2024, Australia is among the world leaders in educating its youth regarding sustainability and how corporations can be part of this global challenge. This is characterised by the numerous discovery courses that are available to commencing students at university and the many collaborations, projects and competitions that are held amongst schools that bear sustainability as a central focus. Recently, the Responsible Investment Association Australasia (RIAA) also announced its intentions on launching an adviser-focused course next month about integrating ESG into investing. According to preliminary details, the course centres on equipping professional investors with the skills to leverage technology such as Generative AI in their sustainability assessments while also training them to respond to company policies by rebalancing their portfolio (Siljic, 2024). While programs like these characterise Australia’s growing sustainable investing sector while predicting further growth opportunities in coming years, question remain on whether the nation’s doing enough to educate its student population on sustainable investing.

One article authored by Lorin Busaan, a PhD student, and Basma Majerbi, an Associate Professor of Finance at the Gustavson School of Business, University of Victoria, highlights a significant gap in current finance education in Australia regarding sustainable investments which in order to mitigate requires the unanimous attention of Australia’s leading higher-education institutions. In their article, they describe the system of Canadian SMIFs which serve as educational platforms that simulate an environment in which student must manage real investment portfolios which can be adjusted in ways that ESG criteria into account (Busaan & Majerbi, 2024). The authors underscore that its is innovations like these that bridge the gap between financial theory and practice are crucial to addressing the education gap in Australian tertiary sector. They posit that when simulation technologies like SMIFs are adequately adopted to financial majors, student will be better instilled with capabilities and skills to address sustainability challenges like carbon emissions and social inequality as both managers and investors. Therefore, the article’s stress the need for business schools to revise their finance curricula to include robust training in sustainable investing. This includes not only theoretical understanding but also practical experience integrating ESG criteria into investment analysis and decision-making.

Ultimately there are certainly educative developments pertaining to sustainable investing that are present at secondary, tertiary and professional level in Australia such as introductory courses that introduce students to the interactions between commercial disciplines and sustainability challenges as well as professional courses that equip responsible investors with skills to leverage AI in investing sustainability. However, despite these courses, as expert evidence evinces, a tertiary education gap persists in Australia’s finance education that does not allow its graduates to replicate theory into practical settings especially those that require the analysis and synthesisation of ESG data. As the article above proclaims, lessons from Canada’s SMIF system can be incorporated to current finance courses in order to enhance student’s performance as both a responsible financial manager and investor. These enhancements, if embraced by Australia’s business schools would help better unlock the stocks of private capital that could be mobilised into projects focused on achieving Net Zero objectives such as the renewable energy sector transformation and ultimately drive sustainable investing in future years.

Conclusion

In conclusion, the investment landscape in Australia for 2024 is shaped by significant transformative factors including technological advancements, regulatory developments, and global pressures. Sustainable investing stands out as a pivotal trend, evolving from a niche interest to a mainstream priority. The updated Sustainable Finance Roadmap and advancements in generative AI are poised to reshape how investors approach ESG considerations, enhancing transparency and efficiency in sustainable investment decisions. Educational initiatives are also crucial, yet there remains a notable gap in integrating practical sustainable investing skills into finance education at all levels.

To address these challenges effectively, Australian business schools must urgently adapt their curricula to incorporate robust training in sustainable finance. This includes leveraging simulation technologies and practical experiences like those seen in Canadian SMIFs to equip students with the skills needed to navigate complex ESG landscapes. By doing so, Australia can foster a new generation of finance professionals capable of steering investments towards both economic prosperity and sustainable impact, thus driving forward the nation’s aspirations for a greener, more resilient future.

REFERENCES

Australian Sustainable Finance Initiative, (ASFI). (2020) Australian Sustainable Finance Roadmap (2020): A plan for aligning Australia’s financial system with a sustainable, resilient and prosperous future for all Australians Acknowledgement of Country.https://static1.squarespace.com/static/6182172c8c1fdb1d7425fd0d/t/6240de97b51f1159dbc20e24/1648418477411/FINAL+Australian+Sustainable+Finance+Roadmap+%28mobile+version%29+%28Embargoed+until+24+November%29.pdf

Busaan, L. & Majerbi, B. (2023, August 27) Business schools must step up on sustainable investing education. (2023, August 27). The Conversation. https://theconversation.com/business-schools-must-step-up-on-sustainable-investing-education-208352

Comendador, N. (2024, May 26). The future of investment: Trends shaping Australia in 2024. Www.nestegg.com.au. https://www.nestegg.com.au/invest-money/investment-insights/the-future-of-investment-trends-shaping-australia-in-2024

Jhaxell. (2024, June 13). How Generative AI transforms ESG data into sustainable investment success. FinTech Global. https://fintech.global/2024/06/13/how-generative-ai-transforms-esg-data-into-sustainable-investment-success/

Kell, J. (2024, March 27). How AI can boost sustainable investing. Fortune. Retrieved July 19, 2024, from https://fortune.com/2024/03/26/smart-strategies-ai-investing-sustainability/

Segal, M. (2024, June 20). Australia Launches Plans for Mandatory Climate Reporting, Taxonomy, Sustainable Investment Labels. ESG Today. https://www.esgtoday.com/australia-launches-plans-for-mandatory-climate-reporting-taxonomy-sustainable-investment-labels/

Siljic, J. (2024, June 27.). RIAA to launch sustainable investing course for advisers | Money Management. Www.moneymanagement.com.au. Retrieved July 19, 2024, https://www.moneymanagement.com.au/news/financial-planning/riaa-launch-sustainable-investing-course-advisers

Torsvik, V., Ellingsen, S. & Vinge, E. (2023, October 3). Can artificial intelligence uncover greenwashing? EY. https://www.ey.com/en_no/digital/can-artificial-intelligence-uncover-greenwashing‌

Written by: Mineka

My Writing Corner Pulse of the World

The $450m Painting? : Interactions and Incongruences between Market Values and Artistic Values in Art Auctions

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The $450m Painting? : Interactions and Incongruences between Market Values and Artistic Values in Art Auctions

Unlike traditional investments like shares or bonds, whose prices reflect the discounted net economic benefits expected over an observable future, valuing artistic endeavours is often perceived as complex task that is usually left to the judgment of historians and art experts. The fundamental problem of determining the monetary value of art cyclically resurfaces during auctions of renowned artworks. For instance, in the Autumn of 2017, Christie’s held a historic auction of Da Vinci’s “Salvator Mundi,” which sold for an astronomical US$450.3 million, the highest price paid for an artwork since Picasso’s “Woman of Algiers” in 2015 (Freeman, 2017). As news of the auction spread across global communication channels, questions arose from academics in various disciplines whose inquiries were later compiled into the 2021 documentary titled “The Lost Leonardo.”

What factors play into the fair value determination of a historic artwork? How does the economics of auction markets justify the staggering price tag of the “Salvator Mundi”? Can contemporary market theory be applied to art auctions, and can formulaic approaches assist in the valuation of art? This article, part of a three-part series, and in the context of the “Salvator Mundi” auction, systematically analyses the first of these questions on what factors play in the price determination of an artwork with specific focus on artistic and market values interact with each other. Together, both articles attempt to redefine our contemporary comprehension of arts auctions and cumulatively assess the extent to which the “Salvador Mundi” fits it exorbitant price tag.

What factors play into the fair value determination of historic artwork?

Before answering this question, it is important to make a crucial distinction between what constitutes as artistic value and market value. Predominantly artistic value is a reflection of the intrinsic worth of an artwork based on a broad range of subjective factors at the discretion of its critics like its cultural significance, emotional impact and critical acclamation while market value is based on observable and objective economic forces like the artwork’s scarcity and market dynamics usually accounted through a monetary figure. Intuitively the market value of an artwork is contingent upon its artistic value and at times these values maybe at disequilibrium although there is now a growing consensus that the two share a bidirectional relationship (Blum, 2021). In the context of Salvador Mundi for example, its fair value was predominantly derived from its association to Leonardo Da Vinci himself whose feats in multi-faceted disciplinary areas still remain a revered endeavour thus increasing the painting’s market value. Conversely, the market value of the Salvador Mundi as decided by the auction market at $450 million triggered artistic debates and renewed scholarly interests regarding the secrets and provenance of the painting which consequently increased its artistic value. This bidirectional relationship is one that is crucial to understanding the economics of arts markets, although frequent debates emerge regarding which value should systematically have a greater influence over the price of an artwork.

One interesting proposition was developed through research published by the University of Melbourne’s Arts faculty concluded that the increasing commercialisation of art coupled by overpowering salesmanship and dynamic market forces is reshaping the arts market such that the artistic value of an artwork is overshadowed by its market counterpart. This tendency tends to discriminate against the artist’s merit which calls for the innovation of methods and mechanisms that while persevering the intrinsic cultural and emotional significance of artworks allows the market value of an artwork to operate (Zhang, 2022).

Through a business-oriented lens, the outcome of Christie’s record-breaking $450.8 million auction is one that encapsulates how increasing commercialisation has led to market values overpowering artistic values in a way that exorbitant prices like this maybe a negative reflection of the artworks intrinsic worth. At first glance, it is feasible to state that the price was a result of the heightened competition among buyers to procure the scarce, one-of-a-kind artwork but extending beyond this argument we realise that marketing and branding in addition to prior ownership of the painting played a significant role in its final price determination. Christie’s compelling branding of the painting as the “Lost Leonardo” generated immense hype and anticipation which led to an associated media frenzy which may have overshadowed the painting’s intrinsic artistic qualities. Similarly, the artwork rocky past of having being owned by controversial figures could have also led to its grand price tag likewise overshadowing its artistic value. These figures with Charles I of England, Swiss dealer Yves Bouvier and Russian oligarch Dmitry Rybolovlev where the latter two were involved in a fierce legal dispute over the market price at which the painting was sold. Like previously stated the influx of market factors is what desecrates and debilitates the intrinsic artistic value of a painting which given the disputed provenance, cultural impact and authentic of the painting could potentially mean that the artistic value of the Salvador Mundi was significantly less that what was reflected through superficial market prices (Kjaer, 2021).

Despite the objectivity of market value over artistic value, the previous passages indicate its inefficacy of determining a ‘real’ price for an artwork just as imperfect capital and product markets today may understate or overstate the values of investments and commodities respectively. As described in the previously mentioned research, independent arts valuators are those responsible for assessing the intrinsic value of art before they allow markets to decide its final price. Art valuators assess artworks based on factors such as cultural and emotional significance, as well as technical attributes like colour and authenticity. They consider the artwork’s historical context, its impact on culture, and its ability to evoke emotional responses from viewers, recognizing these elements as core to its artistic value. In addition, valuators employ modern scientific visual examination techniques to analyse the physical properties of the artwork. These techniques include infrared reflectography, X-ray fluorescence, and pigment analysis, which help determine the authenticity, condition, and original colours of the piece. By combining these scientific methods with an understanding of the artwork’s cultural and emotional importance, valuators can provide a comprehensive assessment of its true artistic value.

Conclusion

In summarising the current insights, it is evident that artistic value and market value maintain a reciprocal relationship. However, commercial influences such as marketing, media, and supply and demand dynamics often cause market value to overshadow artistic merit. This trend is notably observed in art auctions like the 2017 sale of the Salvador Mundi. Buyers frequently prioritize superficial factors shaped by commercial environments—such as brand prestige and previous ownership—over the intrinsic qualities of the artwork when determining their purchasing decisions. Conversely, assessments conducted by art appraisers tend to offer a more accurate reflection of an artwork’s true value. These evaluations take into account cultural significance, historical context, and aesthetic appeal, factors which contribute to the artwork’s worth. Despite their subjective nature, such appraisals are generally regarded as providing a clearer assessment of value compared to market metrics. Looking forward, advancements in technology are expected to enhance the precision of art valuation processes, potentially making artistic value more objective and comparable to market indicators. This alignment would contribute to a more balanced consideration of both artistic and commercial aspects in the valuation of artworks.

REFERENCES

Blum, M. (2021, July 9). Auction mechanisms and the formation of prices in the art market. Theses.Hal. Science. https://theses.hal.science/tel-03648839/

Freeman, N., & Freeman, N. (2017, November 16). Leonardo da Vinci’s “Salvator Mundi” Sells for $450.3 M. at Christie’s in New York, Shattering Market Records. ARTnews.com. https://www.artnews.com/art-news/news/leonardo-da-vincis-salvator-mundi-sells-450-3-m-christies-new-york-9334/

Leonardo da Vinci’s “Salvator Mundi” | 2017 World Auction Record | Christie’s. (n.d.). Www.youtube.com. Retrieved July 27, 2021, from https://www.youtube.com/watch?v=3orkmMlSpmI

Kjaer, H. (Director). (2021). The lost Leonardo [Documentary]. Art Documentary Productions.

Zhang, X. (2022) The Value of Arts and Its Force: The Artistic Value and the Art Market, 638(1). https://www.atlantis-press.com/proceedings/icpahd-21/125969473

Written by: Mineka