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Elections And Market Performance Conundrum Demystified

If the election result is not to the market’s liking, then we may see short-term selling and market under performance

Photo Credit : PTI


The Great Indian General Elections 2019 is coming soon. For all the market participants, this much anticipated event is the epitome of speculations. Uncertainty around the election results, pillar to post chase up to seek consensus, pre-poll surveys, forecasts by numerous outfits and algorithm-based analysis build the hype. We believe that while this a once in five-years festival celebrates our democracy, however, the investor frenzy surrounding the same seems overstretched and largely unwarranted as well. 

In fact, there appears to be a coherent effort across to address only one dilemma “What would happen to markets in case of any negative outcome?”

The answer to this question lies in history. It is said that ‘History is not a burden on the memory but an illumination of the soul.’ So, to illuminate that part of our soul, which seeks investment knowledge, let us evaluate data over a period of 35 years of election period. This data set will help us prove our hypothesis that election related investment frenzy is unwarranted.

Except in 2004, historically unfavourable periods of negative returns during election period have largely been because of global events and resultant risk aversion. In ’97, it was the Asian Currency Crisis, Dotcom bubble in ‘01 and global financial crisis in ‘08. While we have had two extreme market reactions post elections in 2004 and 2009, overall performance trajectory eventually got normalised over medium to long term.

Our ingrained concerns revolving around political uncertainty in view of potential fragmented mandate too appears misplaced. We have had fragmented mandates in past which led to short lived governments between 1996-99. However, over the past 30 years, irrespective of their own ideological and fundamental overview, most of the governments haven’t deviated or reversed the path of policy reforms. 

Another biased view is that the Central government and its stability is the only catalyst for governance in India. Nothing could be further from the truth. The fact is that we tend to under estimate the strength of federal structure and its role in governance and policy making. Basis the size of the fiscal budgets and subjects assigned with states, the contribution of states and local bodies is nearly 60% to the overall governance. Thanks to the new-found competitive federalism, states are today competing in improving business environment and overall governance.   

As expressed earlier, investment decisions based on events is quite overstretched. To meet investment goals, the key requirements are asset allocation and in-tuned portfolio construct with required ring fencing towards the potential risk. Again, historically in the last 10 years, global markets have witnessed many unexpected events like Global Financial Crisis, Euro Zone Crisis, Fed rate hike, Brexit etc. Yet, they have risen owing to ongoing synchronised economic growth and corporate earnings. 

To sum it up, long-term market performance is not an outcome of election frenzy. It depends on Government policies & its implementation and in our view, the structural reforms implemented over the past four years would provide enough impetus to attain healthy growth trajectory for a reasonably longer spell. Inflationary concerns appear to be cooling off lately, while crude oil price and currency movements could continue to be key catalysts. If we take into consideration combined spending of Centre and State governments on Infra, housing, investments and rural, then India looks to be well on course to revive demand and languishing corporate earnings. Hence, we continue to maintain positive outlook on equities.

Ultimately if the election result is not to the market’s liking, then we may see short-term selling and market under performance. However, sound fundamentals and quality investments will drive portfolio outcomes lead by market performance in the longer term.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Election 2019 market

Rajesh Cheruvu

The author is Chief Investment Officer for WGC Wealth (India), a wholly owned subsidiary of Wadhawan Global Capital, one of India’s leading financial services institutions with overUSD 20 billion assets under management.

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