Apart from macro-factors, one of the critical factors you consider while investing or trading in equity and mutual funds market is the “Political Domain”.

As an intelligent investor, you keep a hawk’s eye on political events and act accordingly. The principal determinant of the political ecosystem is the elections, and markets get impacted by the results.

Market sentiments at that point decide if it will be bearish or bullish. Let’s explore how “Elections” impact the markets!

Market Sentiments

Before you take a plunge into the subject, comprehend what “market sentiments” represents.

It may be defined as the tone of the market or a common investor’s attitude towards an event, which may include the political event. The same can be understood as “crowd psychology” which gets reflected as:

  • Bullish: Rising Prices
  • Bearish: Falling Prices

Also termed as “Investor Sentiments”, even though they are not always based on business performance or fundamentals, it is critical for:

  • Day Traders
  • Technical Analyst
  • Investors, especially contrarian investors (who trade in opposite directions of the existing sentiments).

The reason for keeping an eye on market sentiments is to use the same to evaluate and earn short-term profits and to chalk-out a long-term investment plan.

Elections Impacting Market Sentiments

Past experiences of various elections have proven that they do impact the markets, and traders can earn or lose money.

Market sentiments show the following results while elections are on, results are declared, and formation of the new government.

  • Market sentiments are bullish when election results are as expected.
  • Market sentiments are bearish when results are opposite of sentiments.
  • The impact is short-term and cannot be predicted.
  • The usual fight between the bear and the bull starts after some time and markets respond based on fundamentals and business performance after that.
  • Elections may impact the “compound returns” in the long run.

Historic Fact Files

Considering the historic political events and elections, combined with various other elements like global factors, it is evident that you need to go by the market sentiments and evaluate your financial goals to act accordingly.

There have been chances when election results were as per the market sentiments and Sensex rallied for some time to give you a promising return, but then by the next elections, the compound returns were disappointing.

The opposite of such also happened and investors received the unexpected. To better understand the impact of elections, let’s go back to the past elections to appraise some.

  • Lok Sabha Election-1999: The election results were in accordance with the market sentiments and it was encouraging for them when the NDA won. Sensex, then, sitting at 4,600 points raised sharply by 6.5% (300 points). The upwardly trend followed the next three months and rallied over 20%, clearly showing the impact of elections.

The interesting trend observed, later, was the 50% downfall between April 2000 to October 2001 due to local events like scams and global factors like 9/11.

This is a pointer to highlight that the impacts of elections are usually short-term and they fast dissipate.

The market starts following the basic fundamentals very fast and works on the same until the next big event or elections.

  • Lok Sabha Elections – 2004: The market sentiments before the elections were towards a second term of the government. The results were disappointing, as the ruling party could not manage a victory, and the Sensex crashed. The impact of elections was so huge that within three market sessions since the counting began, the drop was to the extent of 15% (700 points).

The noticeable fact after the election is a steep rise in Sensex over a period of time, this time not because of the elections or market sentiments but due to the strong GDP growth and foreign investors’ flows in the Indian equity markets.

This was a repetition of what we saw during the last term of 1999-2004. Distinctly indicating that the impact of elections fast dissipates and the market depends on business performance and other fundamental elements.

Points to Enumerate

There are important take-outs from the above historical elections and their results.

  • The absolute returns on Sensex during the 1999-2004 period was near 14%. The compound returns in the same period were just 3%. Though the elections impacted markets and mutual funds, the impact was short-term and impactful.
  • During the term 2004-2009, the absolute returns on Sensex were near 150%, despite the fact that this duration witnessed the worst global recession. Also, the compound returns were over 20%. These figures can attract any investor and will astound them keeping in mind that this happened during a recession period and when the election result made the market crash drastically.

Similar trends were noticed during the Lok Sabha elections in 2009 when the election results were as per the market sentiments and the Sensex crossed the 20,000 mark.

The absolute returns observed during the term of the government from 2009-2014 were around 67%, but the annualized returns were near 8.7%.

Role of Mutual funds

However, there is another factor which also plays a critical role — performance of the mutual fund, or in other words, determining how good or bad the mutual fund is.

To elaborate this point, let’s consider few cases:

  • Franklin India Prima Plus (Oct 1999-May 2004): As mentioned above, due to elections during this period, the absolute returns were near 14% and the compound returns were merely 3%. In spite of that, the fund gave an absolute return of 128% and compound annual returns of 20%. As is clear from the picture below, an investment of Rs.10,000/- at the beginning of Oct 1999 would have grown to Rs.22,781/- by the end of the government’s term by April 2004.

The case study clearly shows that merely elections will not impact the market completely. There are good funds which will deliver high returns on their own capacities when invested in.

  • ICICI Prudential Dynamic Plan (May 2004-May 2009): The said duration saw an unexpected election result and the market crashed by 15% and then recovered to close over 20,000. Sensex reacted to the global recession and crashed 60% to close near 8,500 by November 2008. Till the time the country was ready for the next election impact, the Sensex stabilized at the 12,000 mark.

The above picture tells an amazing story of the power of a “Good fund”.

When the market had the absolute returns of 150%, the mutual fund gave an absolute return of 239%.

When the market had the annualized compound returns of 20%, the fund gave 28% return during the same period. Therefore, it is clear that the competencies of the fund manager also play a big role.

Conclusion

To conclude the subject, elections do impact the equity markets and mutual fund markets, but till the time market sentiments change due to fundamental factors.

Hence, it is the investor’s research, knowledge, and wisdom to invest accordingly to gain maximum returns without allowing any influence of events like elections.

Happy investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.