Impact of Elections on the Stock Market

The stock market is all about sentiments and elections play a key role in building up and shaping these sentiments. A few months prior to the elections political parties with widely different political and economic agendas clash against each other and try their best to promote themselves in order to win votes. Campaigns, rallies, visiting the houses of prospective voters are ways in which political parties reach out to the audience. Elections bring along with them a lot of mixed vibes since elections affect a lot of things, directly and indirectly.

Speaking about the stock market, there is always slight fear making a home in the minds of the investors if the party being elected can be positive or negative to businesses. Even the changes in economic views and strategies of same government or even ministers can change business prospects of different segments of the economy. Furthermore, there is fear in the stock markets that economic policies being executed up till now by the ruling party may stand changed if the new government arrives. It leads to a spike in market volatility and uncertainty rules the roost during this time period. The more voters feel confused about who the clear winner will be, the more stock markets are affected by this volatility.

The Indian market seems a little nervous ahead of going into General Election 2019 in absence of positive developments in the country and negative global cues. The positive buzz around the government always helps in bringing back the interest of retail investors and FIIs back into the market. A more economy focused government will always yield wonderful returns for the market in the long run. A lot of companies benefit from the increased allocation towards infrastructure and other sectors like transportation, health amongst others. In short, the whole chain of economic activity gets a boost. What government does in its budget is also significant for the companies as regards to taxation and the sector-wise allocation of the funds.

As the country awaits the next general elections, it presents a tail risk, as the market is unsure if the world’s largest democracy will re-elect a majority government for the second straight term. With a few months left for the polls, there are four factors that are likely to determine the prospects of the ruling governments re-election as per a report by Morgan Stanley.

  • Real Growth: While India’s economic growth recovered to 7.2 percent in the last three months of 2017 after falling as low as 5.7 percent after demonetization, it is ‘not strong enough for this position to be totally secure’.
  • Youth Voters: India’s youth is likely to decide the outcome of the elections with 250 million voters between the age of 18 and 28. The ruling party won the previous election with 172 million votes. This sets the stage for a technology-intensive election campaign.
  • Alliances in Uttar Pradesh and Maharashtra: The two states account for 128 seats out of a total 543 in the lower house.
  • The Eight Indicators: Two-wheeler sales, tractor sales, rural wage growth, consumer price inflation, minimum support prices, farmer well-being, direct benefit transfers and jobs growth. “If these indicators are in good shape in the coming months that would enhance the prospects of the re-election of the ruling party led NDA.

Clearly, it cannot be conclusively said that political outcome of the 2014 Lok Sabha election had a non-trivial impact on the markets or that equity investors chose only clean companies in the sustained rally since 2009. To sum up, the linkage between the economy and politics are intertwined in a bi-directional manner. During the boom time, politics try to leverage on the fruits of economic success for electoral gains.

Investors should not let political changes and market volatility change their investment decisions. One should remain invested in the stock markets for a long run, especially during times of uncertainty. The best option is to allow the portfolios to naturally fluctuate and not try to time the stock market

4th September 2018

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