General Elections and their impact on Equity Markets

General Elections and their impact on Equity Markets

The general elections are just six months away. The BJP-led NDA government has provided a stable government for the last 10 years. These 10 years have seen India make rapid Economic and Social development in the country aided by government policies, private sector participation as well and large inflows of foreign capital in the country. However, with market indices currently hovering at record highs, a concern clouds the minds of many: What happens if there's a change in the central government?

The uncertainty surrounding a possible change at the centre worries investors: Could such a change trigger market instability or even a collapse? Naturally, investors wonder whether it's prudent to hold their investments until after the election outcomes.

Looking back over the past 20 years, a consistent pattern emerges— markets react to how investors feel, swinging between hope and fear. Historical data shows times when election results caused both positive and negative market reactions, showing how important investor sentiment is.

Before exploring possible scenarios, it's important to look at how markets reacted to different government changes and if waiting to see the outcomes is advisable.

A) 2004 General Elections: Hope for continuance vs. Fear of Change

Expectations were high for the return of the BJP-led government under Mr Atal Bihari Vajpayee due to a robust "India Shining" campaign. However, the Congress-led UPA emerged victorious, triggering a negative market response, with the Nifty 50 index plummeting by 12.17% in the month following the results. However, the markets recovered in the subsequent year on the back of strong Economic data.

B) 2009 General Elections: Hoping for Continuity, Fear of Change

The markets hoped for continuity as the previous years were marked with rapid Economic progress, and as UPA emerged to victory with more seats than expected and a stronger coalition, the markets rallied following the election, witnessing a 23% surge in the Nifty Index within a month.

C) 2014 General Elections: Hoping for Change, Fear of Continuity

During UPA’s 2nd term anti-incumbency sentiment was high because of the 2G scam, coal scam etc, the perception was strongly against the government and anticipation swirled around Mr Narendra Modi and the BJP's potential ascent. Market dynamics had already factored in this outcome, with the Nifty index rising nearly 19% in the six months before the election. Post-results, the rally persisted, with the index delivering a 4.6% return within a month.

In most cases listed above, the market reaction to election outcomes, whether aligning with general investor sentiment or not, typically proves temporary. Long-term market performance is more significantly influenced by macroeconomic factors such as GDP growth, inflation rates, interest rates, corporate profitability, and government policy decisions.

For instance, following the 2004 elections' initial 12% downturn, the markets rebounded with a 15.8% return within the year and a substantial 39% return if we consider a 1-year period post this downturn. This recovery was driven by India's robust economic growth (with real GDP ranging between 7% to 8%) and supportive government policies aiding local businesses.

What might transpire after the 2024 general elections? To understand this, let’s examine India’s current position:

  1. Market volatility is currently at historical lows (12-13% range), indicating investors' minimal perception of significant market risks. Bullish sentiments prevail, with more buyers than sellers looking to either hold onto their investments or expand their portfolios. Generally, these periods are short in nature as even the bad-quality stocks deliver good returns.

  1. The GDP reflects a robust recovery post-COVID, buoyed by a healthy and swift economic revival. The economy's formalization, facilitated by UPI, digital payments, and GST implementation, has had a positive impact. The resilient domestic consumption has supported the India growth story.

    India’s Real GDP is expected to grow at 6.5% in FY24 as projected by RBI and India is currently amongst the fastest-growing major economies of the world.

Exhibit 2: Real GDP growth rate

  1. Manufacturing is gaining traction, seen through expanding manufacturing PMI, signalling favourable growth prospects. The government’s 14 Production-linked incentive schemes with an incentive outlay of ₹ 1.97 lakh crore further bolster the industry. As can be seen in the graph below the Manufacturing PMI has been above the 50 mark that separates growth from contraction.

Exhibit 3: India Manufacturing PMI

  1. With inflation within the RBI range of 2%-6% and stable interest rates (although slightly at the higher levels because of alignment with global central bank responses, considering India’s import dependence), the environment looks conducive to driving further growth in the economy, unlike global counterparts.

    Going forward we expect inflation to be around the RBI’s target of 4% in the medium term considering moderate commodity prices and ease in food inflation as the effect of erratic monsoon is receding.

Exhibit 4: CPI Chart

  1. Corporate profits are rising thanks to robust consumption demand, increased government spending, and improved policy measures supporting manufacturing growth. Net profits as a % of GDP are at 4.9% (E), the highest after 2008, and expected to rise further due to the current low leverage of Indian corporates and improving business prospects.

Exhibit 5: Profit Surge Analysis

Looking ahead to the 2024 general elections, investors may ponder the market impact. However, regardless of whether the incumbent government secures another term, or a new administration takes charge, India's long-term structural growth story remains intact with strong momentum in its favor. The foundations of the Indian economy—GDP growth, inflation management, interest rates, corporate profitability, and government policies—continue to shape its growth trajectory. Hence, market performance hinges more on these enduring fundamentals than temporary political changes.

If unforeseen election results cause temporary market turbulence, savvy investors might view it differently. Such downturns could offer opportunities to buy quality assets at reduced prices, setting portfolios up for long-term growth.

India's resilient economy, coupled with its sustained growth drivers, suggests that short-term market fluctuations are likely to fade against the broader trend of long-term growth. Therefore, investors can maintain optimism about substantial market returns over time, particularly by adopting a prudent, long-term investment approach and seizing opportunities arising from short-term market volatility.

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