Elections Economy and Equity
As the largest democracy in the world, Elections in India are an integral part which can influence the country’s sentiment and macroeconomic outlook.
It is evident from the historical trends, the equity market's performance pre and post the election results are not all consistent in nature.
In the 2004 Lok Sabha elections, the BSE Sensex, the benchmark index of the Indian stock market, saw declines but saw a sharp rally for the next three years. Despite market skepticism, long term returns turned out well.
Similarly, during the 2009 Lok Sabha elections, the market saw a marginal decline, in the month after the elections but gained in the longer period after the election results. As long as structural reforms continue to be rolled out, by whichever t is in power, markets shall do well in the long run.
*Source: Bloomberg; Sensex Total Return is considered. Past performance may or may not be sustained in the future. Returns are absolute for 12 months before & after election results, 1 month after & 3 years after election results.
India's GDP growth across different governments
Graph: GDP real growth rate across 10 governments
*Note: The number in the red rectangle is from a changed data series starting Jan 2015. While a “superior” series, there is no comparable number to equate the “New” with the “Old”. Most economists deduct 0% to 1.5% from the “New” to equate to the “Old”; therefore, under Modi, the GDP has been at 5.9% at best matching the 5.6% under the BJP-led coalition government of Vajpayee resulting in a rout for the BJP at the time of the next election in 2004.* Please note that data used for World GDP for 2021 & 2022 is a median Estimate since World Bank data is not yet available and India GDP data is the government's third advance estimate released at the end of August 2023.
Source: RBI and www.parliamentofindia.nic.in; data as of September 2023.
As seen in the graph above, irrespective of which political party is in power, the Indian GDP is growing at 6-6.5% across 10 governments over the past 40 years and in nominal terms (including inflation) between 11%-12%. This annual nominal economic growth has a correlation on market returns over the long term. Over a longer period, India’s GDP growth gets reflected in the equity markets.
Equity strategy to navigate the volatility
Market sentiment can go both ways – positive or negative. If the market sentiment is positive, it offers the opportunity to participate in potential market rallies that may follow. However, if the election results are unexpected or if there is a hung parliament, the market sentiment may be negative following the elections, and can lead to a market decline.
However, the loss applies only if you resort to panic selling. It’s important to recognize that the market sentiment be it positive or negative may be temporary. If equity forms the largest component of your portfolio, a sound investing strategy is needed to help navigate the volatility with confidence.
Diversification is Key:
In certain years, equities have performed well. However, during times of macroeconomic uncertainty, equities can encounter headwinds.
The impact of the market cycles is not consistent across equity investments; hence guide your investors to avoid concentrating their investment portfolio. Diversifying the portfolio across market caps, investing styles and asset classes is crucial to mitigate the impact of any fluctuations arising during the election period.
Source: Bloomberg; Data as of 31-Oct-2023. Past performance may or may not be sustained in the future.
