The Impact of Elections on the Stock Market

After three phases of the Election - 2019, the fate of 302 of the 543 seats in the Lok Sabha is sealed. The remaining seats shall see voting in four more phases over the next few weeks. The Nifty and the Sensex have scaled to new highs ahead of the 2019 elections as was the case with the 2014 elections too. In the last two months alone, foreign portfolio investors have infused close to Rs.55,000 crore and that had driven the rally. But how have markets typically reacted to the elections in the previous instances?

To understand the impact of the elections on the market, we can break up the Nifty movement in - 6 months post-election outcome and compare it with the second scenario when the Nifty returns are calculated for a full 1 year (6 months before and 6 months after election). The chart is quite interesting.

Source: ET

What do we infer from the above chart? Irrespective of whether you bought the Nifty on the Election Day and held for 6 months or you bought 6 months prior to the election and held for 1 year, the returns have been very positive. The only exceptions were the elections of 1996 and 1998, but that is perfectly understandable as these were the years that threw up an extremely unstable coalition that did not last for long. If you look at any of the other governments of 1991, 1999, 2004, 2009 or 2014 where the governments lasted a full term, the returns around the election have been actually positive. It did not matter that 1991 was a minority government while 1999, 2004 and 2009 were coalition governments. So the entire obsession about the need for majority governments for healthy Nifty returns may be a tad overstated.

Have governments impacted the GDP growth and stock markets?

If you take the last 5 elections from 1996 onwards, then the GDP growth in the year after the election has been higher than the GDP growth in the year before the elections. The only exception was the 2009 elections but that was understandable because the world economy was just coming out of recession and that led to slightly lower growth in 2010. Other than that we have seen better GDP growth in post-election years compared to pre-election years.

Frankly, elections should not bother one’s investment decision. There are various reasons that affect stock market, not only elections. Also there is not much of a linkage between elections, GDP growth and stock markets. GDP is being driven by a huge domestic market and a young population. Stock markets are being driven by low inflation, corporate profits and more Indians investing in equities. In fact, Indian stock markets have created wealth irrespective of unstable governments, coalition governments, global crisis, droughts and floods. At best, elections are one more such event for the markets!