India is ready to witness one of the biggest political events in about six months, the Lok Sabha Elections. An election is a major event in any country that decides the future direction of its economic, social, and political growth. Here we are going to discuss about the impact of elections on our Indian stock market. The Indian stock markets are susceptible to election fever and might experience the greater volatility during that period. It is generally assumed that if the election outcome is in favor of existing government, the stock market rises as it indicates political stability and vice versa. However, there are various other factors that determine the relationship between the stock markets, some of them are:
– What is the ideology of government.
– What are the expected economic policies.
– Which sectors are expected to boom.
Here’s a snapshot of the steady growth of stock market over a span of last 25 years i.e., from April-1999 to November 2023. In the characterized period, markets have witnessed an upward movement over time. Although there are various factors behind such movement, our focus would particularly be on the semi-annual movements in the stock market during the election phase oscillating from election date. So, let’s dig a little deeper and see what’s happening.
In the periods leading up to the general elections, markets witness the increased volatility due to uncertainties regarding the election outcomes. Below is the tabular representation of market performances during the election phase:
Now, let’s look at each Indian elections from 1999 to 2019 in a bit detail & how they impacted the Indian Stock markets
– 1999: NDA in power
The results of the elections were declared on Oct 6, 1999. The market witnessed a rally in Sensex. Sensex jumped by 6% in a day from the election results. A growth of 31 percent was observed in the 6 months prior to the elections and just 4 percent growth in post 6 months from election date. The huge 31% growth might be due to public anticipating the political stability in the coming years as we were just out of the Unstable coalition government.
– 2004: Surprise UPA victory
Following the 2004 elections, the markets faced a decline, losing around 16% in two trading session due to an unexpected UPA victory. However, this initial crash was followed by a recovery by securing a 10% growth in the next 6 months from the date of elections. Also, a 10% growth was also observed in the 6 months pre-election period. The only remarkable event was a sudden slump in those 2-trading session from the election dates.
– 2009: UPA Again
Return of the ruling party initiated the whooping 17% jump in a single trading session. Despite this, there was a miniscule fluctuation in the markets for a month after election. During that period the global economy was under revival and were bouncing back from the market crash of 2008, which led to the extravagant growth of 60% in the 6 months prior to the election period and the recovery further continued and resulted into 20% jump in the 6 months post-election.
– 2014: Beginning of the NDA Era
The BJP victory brought a stability into the market, reducing the volatility and a flat movement for a month. Despite the initial stability market jumped by around 15% in both the pre and post-election periods.
The potential reason for such a high growth might be the promising BJP party and the promising reforms and policies introduced by them.
– 2019: NDA continues in power
The NDA continued governance led to market upswing, driven by the expectations of sustained economic reforms and political stability. The Sensex saw a flat growth of around 4% in the 6 months following the election dates and slight jump of 8% in the 6 months prior to the election period. In spite of the promising initiatives like “Make in India” and other tax reforms we never saw a huge growth in the characterized period due to constrains by global tensions and structural issues within pivotal economic sectors.
What is the outlook for the Indian economy and stock markets in the previous years and going forward?
In all the previous 5 elections, we have seen the equity market going up irrespective of the party coming in power, in which 2009 witnessed the highest growth of approx. 90% in a 6 months pendulum from the election date. Looking ahead, a potential NDA victory in the upcoming elections might sustain the market stability if backed by the assurance of continued economic reforms.
Moreover, the past trends highlight the importance of continuity of policies and economic reforms. While elections introduce volatility, the continuity of ruling party results into political stability and economic reforms which will boost the nation-wide economic growth, which will have a corresponding impact on the stock markets.
According to S & P Global, India is likely to grow at an average of 6.7 percent by 2030-31. Its GDP is likely to grow from US $ 3.4 trillion in FY23 to US $ 6.7 trillion in the next 6 years taking per capita income from US $2450 to US $4500.
As per Morgan Stanley’s recent report, for the 2024 elections, if the current government wins the election with a clear majority, then the market could gain between 0% and 5% in the three months after the election. If the government does not win a clear majority and a coalition government is formed, the market may fall between 5% and 25%. If the ruling government loses, forming a weak coalition that would mean little power, the stock market could crash by a massive 40%. It would be the worst-case scenario.
Conclusion:
Examining historical trends from the last five general elections reveals a consistent pattern: a notable average return of 25% six months prior to the elections and a subsequent growth of approximately 10% in the six months following. Given this analysis, there appears to be a prospective uptrend in the Sensex as we approach an election season. This presents an opportunity for investors to enhance their wealth by augmenting their equity holdings. Since, it is difficult to time the markets, there might be a chance that an investor can miss the spike as one cannot trace the exact period and magnitude of the spike. To navigate this unpredictability, a wise strategy involves increasing Systematic Investment Plans (SIP) contributions during the period. By doing so, investors can position themselves to capture potential gains while mitigating the risks associated with market timing. The strategy encourages patience and resilience through market fluctuations, recognizing the compounding benefits over time. Even if an investor opts for a lumpsum investments backed by a long-term view, the holdings are likely to grow as India is poised to become a superpower in the future and nothing can stop India’s growth story.
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The article is authored by Mr. Vishal Gangaramani from Team RichVik