Why the Elections should not spook you

By Larissa Fernand |  20-05-19 | 
 
No Image
About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

Credit Suisse has been very consistent in its attempt to debunk the view of elections impacting the market. Neelkanth Mishra, co-head of equity strategy for Asia Pacific, has often reiterated that stance by telling Indian investors not to over emphasize the impact of elections.

In a chat with Bloomberg, he explained that if one had to plot the Nifty six months prior to and post the elections, it would be very hard to find if you did not know where the election was. There is no inflection. If the trajectory was upwards, it is upwards. If it was sideways, then it is sideways. It was down, then it keeps going down. The only impact would be on a long-term basis when policy changes are taken into account.

Do note the emphasis on long term. Something every investor must keep in mind.

When the Congress-led UPA emerged as the surprise winner in 2004, the stock market crashed abysmally the next two days. The tumble was attributed to fears of the economy slowing down, whether or not reforms would continue under the new government (as the coalition relied substantially on the communist parties to stay in power), as well as Emerging Markets losing their sheen.

But the market did not languish at those levels for long.

In a note in December 2018, private wealth management outfit Anand Rathi noted that in 2009, the market delivered almost 55% absolute returns over the 12-month period during elections (6 months before and 6 months post start of polling). However, in 2004, it was a 17% absolute return. Not as high, but the point is that it never stayed in the doldrums.

India Spend dug up data to conclude that the Nifty and Sensex showed a rise six months after the four General Elections, compared to the previous six months.

They analysed the Nifty and Sensex on 3 key dates

  • 6 months before the first day of polling (pre-election)
  • 1st day of polling (during the election)
  • 6 months after the first day of polling (post-election)

The last four General Elections covered

  • 1999
  • 2004
  • 2009
  • 2014

The election outcome

Both political parties, the Indian National Congress (INC) and the Bharatiya Janata Party (BJP), have coalitions stitched to secure their back. The INC leads the United Progressive Alliance (UPA) and the BJP leads the National Democratic Alliance (NDA).

  • 1999: NDA formed the government, despite falling short of a majority
  • 2004: UPA
  • 2009: UPA
  • 2014: The BJP won a simple majority and formed the government along with allies

The market reaction

In all four cases, both the Nifty and the Sensex rose. But both saw a significant rise during the 2009 elections.

What can one expect this time?

Let’s be clear. No one knows for sure what the result will be. Let alone how the market will react once results are declared.

Having said that, the general consensus is that the BJP-led NDA will be back. This continuity of the incumbent should see the market stay on course.

The alternative is that the Congress-led UPA will come to power. The change in guard could create some volatility. But it would settle as the sentiment is that a stable government would augur well for the country.

(A stable government is one where a political party and its alliance cross 272 seats of the 543 Lok Sabha seats. In the 2014 election, the BJP won the majority on its own.)

The worry amongst investors is the Third Front coming to power - a coalition of regional parties. This would probably cause extreme short-term volatility as the market will react to instability and uncertainty.

A very fragmented verdict and concern over who will be India’s next prime minister would cause a knee-jerk reaction in the market.

Keep this in mind

What would please the market is a stable government committed to economic reforms. But whatever upheaval the market faces, investors must remember that it will eventually stabilize. Ultimately, it is earnings growth and economic growth that determine its long-term direction.

Thus far, earnings growth has disappointed, but the market returns have been positive. In fact, despite a fair number of companies witnessing a decline in earnings growth, valuation multiples have expanded. This cannot continue unabated. A sustainable driver of returns, which is earnings growth, will have to take centerstage. If earnings growth does not catch up, there could be a correction (and this has nothing to do with the General Elections).

When we look at the economic backdrop of a fall in interest rates, lower inflation environment, stable rupee and stable oil prices, one should logically see earnings pick up. Stick to fundamentals.

Another point worth noting is how narrow this rally has been. Barring a few large-cap stocks, the majority of the market has not delivered. It would be interesting to see how long this differential trend continues.

Nitin Singh, MD, and Vinay Joseph, chief investment strategist, Standard Chartered Wealth Management, suggest that investors look beyond large caps. They believe that mid and small caps offer better risk-reward compared to large-cap equities. And should there be a correction, it would be wise to pick up stocks based on solid fundamentals.

Just don’t be in haste to sell based on the outcome of the elections. On the flip side, don't go on a binge if a stable government comes to power.

Remember, no one can predict election results. No one can predict the direction of the market. What we can control are emotional responses and knee-jerk reactions. Stay focused on fundamentals.

Add a Comment
Please login or register to post a comment.
Rajshakher Kanna
May 23 2019 02:03 AM
Thanks ..............................................................
1<>
Top
Mutual Fund Tools
Feedback