The country is caught up in election fever with the result of the assembly elections in the four states expected today. This has thrown stock markets into a tizzy. Leading foreign brokers have already ‘upgraded’ India based on expectations of Narendra Modi winning the next elections, and the Sensex vaulted 450 points on Thursday after exit polls indicated a BJP win.
But Indians are not alone in setting great store by politics and elections. Elections are closely tracked by investors in stock markets across the world. Much ado is made about the four-year Presidential cycle in the US markets, according to which US markets are said to be the weakest in the year following the one in which a Presidential election is held. The US market mostly heads up from that point until it is time for another election. But how important are politics and elections to Indian stock markets? We did an analysis on the Sensex returns in the years in which elections have been held, and this is what we found.
In 1980, when Indira Gandhi formed the government after the failure of the Lok Dal coalition, Sensex gained 53 per cent in the following year with gains petering out after that. In 1984, when Rajiv Gandhi became the Prime Minister following Indira Gandhi’s assassination, the same trend was seen, with Sensex gaining 94 per cent in the second year. In 1991, when P.V. Narasimha Rao took charge of an economy that was collapsing, Sensex gained 82 per cent in the first year and 37 per cent in the second year.
The year, 1991, also proved to be an inflection point for the economy with the country on the brink of bankruptcy and India having to pledge its gold with IMF. Manmohan Singh, the Finance Minister then, initiated a series of liberalisation measures, the benefits of which are still being reaped. In 2009, too, the highest return was made in the first year of the rule. The exception to this rule was during the BJP’s rule between 1999 and 2004 when Sensex made the maximum gain of 73 per cent in the fifth year. Following those bumper gains though, there was a sell-off when the BJP lost the next general election.
Fundamental driver While reading the election cycle can be of academic interest to Indian investors, foreign investors are far more interested in what changes at the helm do to the fundamentals of companies, than in which party is in power.
“Politics is more of a distraction to foreign investors. They do not invest in India because of what the government can do. They invest because they can find good companies. What is central is company profits, return on equity, leverage and so on,” says Geoff Lewis, executive director and global market strategist with JP Morgan. Espirito Santo, a financial services multi-national, in its recent report notes that there is no clear pattern in market movement before and after elections. “Our analysis of historical election outcomes suggests that market behaviour is erratic pre and post elections based on probability of election outcomes. The impact of election results is generally neutral to positive for the market, unless a third front wins (like in 1996). We wouldn’t bet heavily on the election outcome, and instead focus on the fundamentals.”