How Does the Election Results Affect the Share Market?

Elections and the Stock Market: What Indian Investors Need to Know
If you're an investor in India, you've probably noticed the stock market can get a bit jittery around election time. With the next big Lok Sabha elections in 2024, let's discuss how elections influence the markets and what that means for your investments.

Why Do Elections Move the Markets?

At their core, elections create uncertainty, which makes stock market nervous. When a new government takes over or an incumbent party retains power, it can lead to big policy changes, which affect different industries and economic sectors in different ways.

For example, if a pro-business party wins, sectors like banking, infrastructure and manufacturing may benefit from friendly policies and incentives. On the other hand, regulations in sectors like tobacco, alcohol or polluting industries could get stricter.

This uncertainty around future policies and their impact creates stock market volatility as investors speculate on who the winners and losers will be under the new regime. But it's not just policies that can impact the overall economic trajectory—elections can also impact foreign investor sentiment, political stability, and reforms.

The Impact of Elections on Stock Markets: A Historic Perspective

To understand how upcoming elections could affect the markets, it's instructive to look at what happened after previous elections in India. Here's a detailed recap:

● 1989 - Coalition Era Begins 
The 1989 elections marked the beginning of the coalition era in India, with a united opposition forming the National Front coalition government. This period was marked by significant political turmoil and market volatility.
The uncertainty around reforms and anti-corruption measures under the new regime failed to immediately stabilise the economy. This reflected the disruptive impact that elections and shifts in power can have on market sentiments.

● 1991 - Congress Returns, Reforms Follow 
The assassination of former PM Rajiv Gandhi in 1991 intensified market instability and pessimism initially. However, the Congress government led by P.V. Narasimha Rao went on to introduce groundbreaking economic liberalisation policies.
These reforms aimed at opening up the Indian economy helped bolster market confidence. Investor sentiment improved, paving the way for economic recovery and growth in the aftermath of this volatile election period.

● 1996-1998 - Unstable Coalition Govts, External Shocks 
The two years between 1996 and 1998 saw frequent changes in government, with several unstable coalition regimes taking the helm. This perpetual political disruption and lack of policy coherence was exacerbated by external economic pressures like the Asian Financial Crisis.
Unsurprisingly, market confidence took a beating during this phase. The domestic economic downturn, coupled with global headwinds, led to subdued returns and bearish sentiments.

● 1999 - NDA Brings Stability, Rallies Begin 
When the BJP-led National Democratic Alliance (NDA) took power in 1999, the election results were largely along expected lines for the stock markets. The Sensex climbed 7% on the outcome and continued rallying for 3 months.
The NDA's decisive majority brought much-needed political stability and a pro-growth agenda. They focused on structural reforms, economic liberalisation policies to attract FDI and sectoral overhauls.
Inflation was kept in check, and the economy's GDP growth rate initially accelerated to an impressive 6-7% range. However, global events like the 9/11 terror attacks on the U.S., coupled with some domestic issues, ultimately led to a steep 50% market correction a couple of years later.

For the NDA's full 5-year term, the annual returns compounded at around 3%, with an absolute gain of 14% for the Sensex.

● 2004 - Unexpected UPA Win Jolts Markets
When the Congress-led United Progressive Alliance (UPA) defied exit poll predictions to win the 2004 elections, markets were caught off-guard. The Nifty slumped 12.24% on result day before bouncing back 8.3% the next day. Over the next 5 days, though, the index recovered all losses and ended up 16% higher.

This initial volatility was due to the unexpected nature of UPA's victory over the incumbent NDA government. However, markets quickly recovered as the new regime focused on economic reforms and targeted 8% GDP growth.
Aided by value sectors like banking and infrastructure, FDI inflows into India reached a record high of $34 billion by 2008. The bull run continued until the global financial crisis struck, after which markets sold off before recovering ahead of the next election cycle.

● 2009 - UPA's Re-Election Sparks Massive Rally
There were no surprises when the UPA coalition won a second term in 2009. But what shocked markets was the ferocity of the ensuing rally - the Nifty spiked an incredible 17.74% higher on the result day itself before cooling off slightly.

Over the next 5 days after the results, the index witnessed some profit-booking but ended around 2% higher overall, reflecting the initial euphoria and optimism around policy continuity.

However, this optimism faded as UPA's second innings was marred by corruption scandals and accusations of policy paralysis hurting investor confidence. Despite GDP growth of around 7.5% in the first 3 years, the administration struggled to rein in fiscal deficits and inflationary pressures.

The domestic investment cycle slowed, with FDI equity inflows shrinking compared to UPA 1's tenure. This wariness around governance issues and economic management capped the extent of the post-election stock market rally.

● 2014—Modinomics Rally Begins 
When the BJP returned to power under Narendra Modi's leadership in 2014, it marked the beginning of a fresh bull market rally. On the result day, the Nifty rose 1.12% and extended gains with a 0.84% rally the next day. Over the next

five days, the index appreciated by over 2% more.
This was driven by investor optimism around the prospects of firm governance and an acceleration of economic reforms under the new regime's Modinomics agenda. Expectations were also buoyed by promises of curbing inflation and pushing through long-pending reforms for sectors like banking, infrastructure, etc.

While the euphoria faded after the initial spike, markets continued scaling new peaks over Modi's first term, buoyed by improved macroeconomic fundamentals. Corporate earnings growth also recovered gradually after a subdued few years.

Overall, though, the returns of around 40% over 4 years were seen as a tad muted, given the lofty expectations. Factors like global crude oil price shocks, faltering export growth, and a weakening rupee capped larger upsides to the "Modi bull run".

● 2019 - Second Term Reinforces Policy Continuity
When the BJP won a thumping re-election in 2019, extending Modi's premiership, markets responded positively, though not as euphoric as in 2014. The Nifty ended the day 0.69% lower but recovered quickly with a 1.6% rally the next day. Over the next five days, it added another 2.48% return.

With Modi firmly in the saddle for a second term, investors reacted to the likelihood of policy continuity and deepening of reforms around manufacturing, infrastructure, ease of doing business, labour laws and privatisation.
However, return expectations were likely more muted compared to the 2014 frenzy. Persistent challenges around economic growth, risk-off sentiments stemming from global trade wars, and structural issues in key sectors like banking tempered rallies.

To summarise, an examination of Sensex returns during different Prime Ministers' tenures reveals that election politics don't significantly sway equity returns in the long run. The overall wealth creation trajectory tends to remain positive, maintaining an upward trend irrespective of the political party in power. However, there are variations and specific instances when market performance has deviated from this norm.

Stock markets typically experience heightened volatility in the lead-up to general elections due to uncertainties around election outcomes and potential policy shifts. Analysing past data, markets have delivered an average return of around 29.1% one year before elections and 6% in the month preceding the polls. These statistics indicate strong market performance during pre-election periods, with a few notable exceptions.

For instance, in 2009, markets witnessed a 24.9% decline in the year before the elections. However, this was offset by a remarkable 26.8% surge in the month following the election results. Despite the uncertainties and a tendency among investors to adopt a wait-and-see approach, historical data suggests that markets have generally performed well during election seasons.

What Could Influence Markets in the 2024 Elections?

● Exit Poll Predictions
Exit polls can greatly affect markets, as seen in 2004. Early predictions often lead to unwarranted optimism or pessimism, creating artificial volatility. Investors will closely monitor exit poll updates from major agencies.

● The Modi Factor
PM Narendra Modi's popularity has positively influenced markets, especially among urban middle class, youth, and business communities. If he continues to lead, markets may react favourably. His departure could cause pessimism and fears of stalled reforms.

● Opposition's Economic Blueprint
The opposition's criticism of BJP's economic policies raises the question of their alternative. A strong plan addressing key issues could gain investor confidence. Conversely, vague promises without a clear growth strategy could unsettle markets.

● Global Factors & Investor Sentiment
Global factors could increase market volatility around the 2024 elections. Global news will influence foreign investors' sentiment. Recession risks, geopolitical tensions, US Fed interest rate changes, and commodity price trends could affect investment in Indian stocks.

● Tax Policies & Corporate Earnings Impact
Corporate tax policies will be crucial. Promises of lower taxes could boost markets, improving corporate profits and stock valuations. However, if tax increases are proposed to fund populist schemes, it could alarm markets, especially in the IT, pharmaceuticals, and consumer goods sectors.

Outlook for the Indian Economy

Since 1980, India's government has changed 11 times, with eight of those being coalition governments. Since 2014, the BJP has maintained a clear majority. Over this period, India's average real GDP growth has been 6.2%, and the Sensex has grown annually by 9.5% in dollar terms and 15.5% in rupee terms up to August 2023. As the 2024 general elections, there is speculation about how the market might react, especially with a unified opposition strategy against the BJP.

Coalition governments in India often lead to consensus-driven decisions, which can enable significant reforms. However, this approach can slow down the pace of economic growth compared to countries like China. India's long-term real GDP growth potential is between 6.0% and 6.5%, translating to an 11- 12% nominal GDP growth. Factors such as corporate productivity, the impact of artificial intelligence, and other ongoing changes will continue to influence the equity markets. As a result, double-digit nominal returns are expected to persist for the next two decades.

Top Sectors to Watch After the 2024 Election

The 2024 elections are expected to influence the Indian stock market significantly. As investors anticipate new policies and reforms, several sectors are positioned for potential growth. Here are the top sectors to consider investing in after the elections to maximise returns.

● Infrastructure
If the current government continues, infrastructure growth is likely. The government has increased capital expenditure for infrastructure to ₹11.1 trillion for FY 2024-25. Improved infrastructure can attract foreign investments, boost trade, and enhance financial stability. Companies like L&T and PNC Infratech are expected to benefit.

● Power and Renewable Energy
India has vast coal and hydroelectric resources, but the renewable energy sector holds significant potential. The 2024 interim budget's "PM Suryodaya Yojana" allocates ₹10,000 crore to solar energy, signalling strong growth prospects. This sector is poised for expansion, making it an attractive investment.

● Banking and Financials
The banking sector remains a promising investment post-election. Banks are crucial for capital allocation and are considered relatively safe investments. The sector looks appealing with India's Current Account Deficit estimated to reduce to 1% of GDP. Expected interest rate cuts by the RBI could further spur growth.

● Tourism & Hospitality
The tourism and hospitality sector is set for growth after the election. In 2022, tourism contributed ₹15.7 trillion to the economy, about 4.6% of GDP. Government schemes like "Swadesh Darshan" support this sector, making it an appealing investment opportunity.

● Healthcare
India's healthcare sector offers investment opportunities with initiatives like Modicare and Mohalla Clinics. With an ageing population, government spending on healthcare is expected to rise. If the current government is re-elected, healthcare programs will likely continue to receive support.

● Defence
India's defence budget has been increasing, with the interim budget allocating over ₹6.21 lakh crore to the Ministry of Defence, a 4.72% increase from FY 2023-24. The government encourages foreign investments in defence, potentially leading to more collaborations and increased FDI.

● Railways
A continued NDA government would focus on modernising and expanding railway infrastructure. High-speed rail projects and station redevelopment are priorities. The National Rail Plan 2030 aims to invest ₹50 lakh crore in railways, benefiting companies involved in railway projects.

● Oil and Gas
The BJP government promotes increased domestic oil and gas production. Initiatives like the Hydrocarbon Exploration and Licensing Policy (HELP) and the Pradhan Mantri Urja Ganga project aim to enhance energy security and boost gas companies' operations.

● PSU Banks
Reforms in PSU banks, including recapitalisation and improved governance, have been ongoing. A BJP re-election could accelerate these reforms, improving asset quality, financial health, and lending capacity.

● Startups
India's startup ecosystem has grown significantly, with sectors like FinTech, HealthTech, and EdTech attracting substantial investments. The BJP government’s focus on ease of doing business could further benefit startups, creating a favourable environment for growth.

● Ethanol
Union Minister Nitin Gadkari advocates for ethanol as an alternative fuel, aiming for 20% ethanol blending by 2025. With initiatives like ethanol-powered vehicles and Indian Oil Corporation's ethanol plant, this sector is set for substantial growth.

Tips for Investors During Election Season

● Diversify Your Portfolio: Building a diversified portfolio can protect investments during periods of volatility.

● Use Dollar-Cost Averaging: Investing a fixed amount regularly can lower investment costs and maximise returns over time.

● Focus on Long-Term Investments: Maintaining a long-term perspective can help avoid impulsive decisions based on short-term market fluctuations.

● Take Advantage of Higher Interest Rates: Consider moving emergency funds to high-yield savings accounts to benefit from higher interest rates.

● Consult a Financial Advisor: A financial advisor can provide personalised advice to ensure your portfolio is well-diversified and aligned with your investment goals.

Conclusion

Indian elections often cause short-term stock market volatility due to uncertainty and speculation about political changes. However, long-term returns are more influenced by the country's overall economic growth, corporate earnings, and consistent policies. As the 2024 elections near, maintain a diversified portfolio and focus on sectors likely to benefit from policy changes. Remember, while elections can cause short-term market swings, long-term investing focuses on solid business fundamentals.