With the date of 17th Lok Sabha being announced, there is one question that is on every investor’s mind – what will be the election effect on the stock market? Election and stock market is related because elections decide which government will be in power over the next 5 years. To understand the election effect on the stock market we need to understand that in general the markets and the investors like stability and react positively to it.
Historically it has been seen that election effect on the stock market has been strong, but short term.
Stock markets are generally seen as an indicator or predictor of the economy. How the economy in a growing country like India will pan out in the future depends a lot on government policies and reforms. The general perception also is that if there is a stable government at the centre, especially a government which is known for development and investor friendly policies, then the economy will be on a growth path. Election effect on stock market thus depends a lot on how investors think that the elections will pan out.
We can broadly divide the election impact on stock market into two different phases.
Run-up to the elections: The stock market works on concrete news or information. But till there is such news or information, stock markets will work on assumptions and speculations. If the general perception is good, the markets are positive and vice versa. Since the BJP government is perceived to be investor friendly and since it has brought about reforms like GST, the perception is that markets would respond positively to the BJP government being back in power.
If the perception of the government is a positive one and if it is a government that has had a track record of investing heavily in sectors like infrastructure and health, the interest of retail investors in the stock markets gets a boost and so does participation by Foreign Institutional Investors. At the same, time the chances of a fractured and indecisive government bring about some uncertainty. In the run up to the elections the perception keeps on shifting and markets may react accordingly.
Once BJP lost the elections in three key states Chhattisgarh, Madhya Pradesh and Rajasthan, the markets reacted by closing lower. However, when it was learnt that the margin of defeat was low, the markets recovered. After the recent Pulwama attack, Sensex and Nifty fell sharply after tensions rose between India and Pakistan. After some uncertainty money the markets again rallied after investors gained confidence that the Modi-led BJP Government has a considerable chance of coming back to power. Some opinion polls also said the same thing and that boosted market sentiments. One can expect the markets to remain volatile till the new government is formed.
When elections results are out: Investors always prefer a clear majority and the current Government to stay in power because some of the financial measures the government has taken will take some years to bear fruit. If the BJP is re-elected with a clear majority like in 2014, the markets will definitely show a strong short-term uptick due to positive sentiments. If the BJP falls short of majority but still manages to stitch up alliances and form a government, the markets will be volatile for a while, but will recover and stabilise once a stable government forms at the centre. If there is no clear winner and there is clearly a fractured mandate, the markets are likely to crash and may not recover till a stable government is formed at a centre. In the scenario that the Congress has a clear majority, the market may show some initial signs of being negative, but once the Government is formed, it will bounce back. In order to understand election effect on stock market the bottom line is that irrespective of which Government comes to power, the stock markets like stability. When there is uncertainty, the markets react in an adverse manner. Right now, lot of investors are buying stocks with the hope that when a stable government comes to power in the centre, the value of their stocks will go up. If that is not the case, then the markets will see some correction.
However, retail investors with a long term investment horizon should not worry about the election results impact on the stock market and try to time the markets. Even if there is a fractured mandate, the markets have in it the character to absorb the losses and be on a growth track again. The prudent investor should have belief in the India growth story and rely on the fundamental principles of investing.