Stock markets are erratic and heavily influenced by events both domestically and internationally. Elections are no different. Any nation's election is a momentous occasion that determines the course of its future political, social, and economic development. Indian stock markets are more volatile during election seasons and are prone to election fever. Elections have an impact on financial markets, as we already know, but how this occurs is still a mystery. Let's first examine what stocks are and how they operate before delving further into the elections and financial markets.
Market observers frequently search for signs that the outcome of the general election, which will decide India's leadership for the next five years, would affect public sentiment as voters get ready to cast their ballots. Election results have historically had a big impact on market movements. For example, when the BJP lost power in 2004, the market fell; when the Congress party came back to power in 2009, the market rose. Similar to this, in 2014, a pre-election market spike was sparked by expectations for Modi's leadership.

Stock Markets: What are they?

An arrangement where buyers and sellers meet together to buy and sell stocks or shares of the companies listed on the stock exchange is known as a stock market. In exchange for a portion of the company's ownership in the form of shares or stocks, a stock market arrangement is essential for helping businesses raise money from the public for continued expansion or to guarantee smooth operations.

How is the Stock Market Operated? 

It enables pricing negotiations and stock exchange-based transactions between buyers and sellers. Through an IPO, or initial public offering, businesses that are willing to generate funds for the public list their shares on the stock exchange. Investors can purchase or sell shares among themselves once they are listed on the market, which aids in the company's ability to raise money.

How do Stock Prices Become Decided?

The dynamics of supply and demand affect stock market pricing for different stocks. The price of a stock increases when there is a greater demand—that is, when there are more buyers than sellers—for that specific stock. In a similar vein, stock prices fall when there are more suppliers—that is, sellers—than buyers.

How do Investors Decide what to Buy and What to Sell?

To choose whether to purchase or sell a stock, investors consider the news and events of the past several days. Positive market sentiments encourage individuals to purchase a firm's shares when the company releases good news, and vice versa. For instance, the fact that the Airports Authority of India has given the Adani Group maintenance control over Jaipur International Airport suggests that the corporation is growing and gaining more power. As a result, the market views the Adani Group's shares favorably, which boosts demand and drives up share prices. Similar to this, if the Indian government decides to raise corporate taxes, it will probably cause negative market sentiment and a general decline in stock prices.

How do Elections effect the Stock Market?

Due to the uncertainty they entail, elections are among the most volatile periods for the stock market. Political events, such as elections or changes in legislation, have a significant impact on the stock market, much like changes in the economy. It is commonly believed that a positive election result for the current administration will boost the stock market since it signals political stability and vice versa. Nonetheless, there exist multiple alternative rationales for the impact of elections on stock market values. Let's examine the variables that influence how elections and stock markets interact.

What does the Manifesto for the Election Contain?

A collection of all the social, economic, and environmental policies that the running parties pledge to implement if they win an election is called an election manifesto. In the event that a specific party's election manifesto includes measures aimed at stimulating the national economy. For example, if a party running for office pledges in its manifesto to cut taxes and most of its programs focus on economic growth, there's a chance it will win, which could boost stock prices.

The Government's Ideology 

Positive market sentiment will result in an increase in share prices if the winning party has a stronger plan for economic growth over the course of its five-year roadmap. Similar to this, if a party with ambiguous and conflicting platform appears to be winning the election, it will negatively affect market sentiment and cause share values to plummet.

Results of the exit Poll 

Exit poll results show which party has a better chance of victory. A pre-election mock poll used to determine which party has a better chance of winning is similar to an exit poll. Stock prices will rise if the party with superior economic policies has a stronger probability of winning, and vice versa. The stock market will rise in value and political stability will be indicated if the exit poll results support the current party.

Anticipated Financial Strategies

Should the more likely candidate be predicted to implement stronger economic policies to support the nation's expansion and advancement, the stock market may exhibit a positive trend.

Which Industries or Sectors are Anticipated to Grow? 

The uncertainty surrounding the election and post-election period has a significant impact on several industries in addition to the stock market overall. The stocks of the real estate and infrastructure sectors will rise, for instance, if the winning party intends to concentrate on building the nation's infrastructure. Similarly, the stock values of pharmaceutical businesses will drop if the winning party's election program contains policies that could negatively impact the industry.

Personality & Popularity of the Leader

The stock market's price trend is also determined by a leader's personality. For instance, if the leader is well-liked and powerful, he can attract more foreign investment, which will boost the nation's economy and good sentiment and drive the stock market upward. Even if the stock market is the most unpredictable entity in the modern world, there are a few indicators that can help you forecast its movements. Among those are the elections. There's always a spike in stock market sensitivity right before an election. Elections and stock prices have a complex relationship that is impossible to forecast. Nonetheless, one can forecast the direction of the stock market by examining the election platform, ideology, policies, and exit poll findings.

But the market's response to a BJP win might differ from earlier optimistic patterns. Experience from the elections of 2019, which saw the NDA and the BJP win more seats than they did in 2014. While the NDA's tally rose from 336 to 353, the BJP's jumped from 282 to 303. Additionally, the BJP extended its influence from northern and western India to eastern India. Despite this, the market had a 6% decline in three months following the election (see the graph).

Buyers may follow the maxim "buy on rumour, sell on news," believing that the election result, which has already been factored into current market values, won't likely cause a big increase. Values are another factor contributing to the restricted upside. India has a 30x TTM P/E ratio (not including banks and NBFCs). By all means, this is not a cheap valuation. Even the well-known market capitalization to GDP ratio, which is based on the GDP of FY2024, is 12.7 percent; a year later, it is 11.6 percent.

India's Economic Prognosis for 2024

India's Projected Growth
India is expected to have one of the world's fastest expanding major economies by 2024, according to a very optimistic economic estimate. This growth is supported by a combination of persistent external and internal forces. India is seeing favorable domestic outcomes due to a surge in government spending on infrastructure, a flourishing digital economy, and growing consumer demand. The nation's improved business regulations and political stability are drawing in more foreign direct investments from abroad.

Elections' Effect on Market Performance 

Past Results of the Market In Years of Elections
India's election years have historically seen increased investor interest and market activity, which reflects the anticipation and unpredictability around prospective policy changes and the stability of the government. Examining past market data reveals a distinct pattern: due to expectations of stable political conditions and continued economic policies, markets typically perform well both before and after elections.

Market indices often climb in the six months preceding elections as investors start to position their portfolios favorably based on anticipated election outcomes, according to data from previous election cycles. For example, prior elections have resulted in an increase in average market returns, indicating a good feeling among investors driven by the possibility of stable government and the expectation of reformative measures. Moreover, this rally usually lasts after the election since established policies and new government structures give market movements a more defined course.

High market valuations in India are a reflection of the country's anticipated rapid future growth. Such valuation levels do, however, require careful consideration because, should earnings growth fall short of expectations, they could result in compressed future returns. Investors must determine whether the underlying fundamentals and prospects for profits growth of the companies they are investing in justify high valuations.

Tensions in the global economy, such as trade wars, geopolitical conflicts, or other international issues, can affect India in a number of ways, including trade, investment, and commodities prices. For example, geopolitical unrest in oil-producing areas may cause oil prices to rise, which would be detrimental to the Indian economy.

Conclusion

Given that India's economic future depends on a number of variables, including business profits, government policies, monsoon patterns, and inflation trends, it is more likely that broader economic fundamentals would influence post-election market dynamics than just election results. In summary, the general election will definitely affect India's political climate, but investors can only expect limited favourable outcomes because market moves are more strongly linked to underlying economic data than to electoral outcomes.