Elections have always made investors jittery.
There is always fear which starts creeping in due to uncertainties associated with elections.
As the general elections approach, investors get worried about the performance of mutual funds due to market volatility and the absence of positive news at the global level.
As the political domain is one of the most critical factors, we will analyze how the markets have behaved after every election.
While looking at the trends, there has been some downfall in the market during the years 1989,1998, 2009, and 2020 but were these really because of the election, that is the primary question.
In the year 1989, Congress had lost the election. There was a significant interdependence of market and government concerning volatility.
Within two years India saw two different governments. The assassination of Mr. Rajiv Gandhi added to the market volatility leading to increased uncertainty.
The economy of India was suffering; the Gross Fiscal Deficit reached 12.7% of GDP with inflation at 10.26%. India barely had forex reserve to finance three weeks’ worth of imports, and that was the main reason for the market performing not well.
In 1991, Congress won the election and formed the government.
It regained confidence in the market, and the market started attaining growth. During this tenure, the government took multiple steps for liberalization and laid a red carpet for global investors to invest in India, which helped the market gain momentum.
Impact of Elections on the Markets and Mutual Funds
The years 1996-1998 were again very turbulent for the Indian market. India saw three different prime ministers come and go.
As there was no stability in the political domain, the confidence in the market was also going down.
At the very same time, the Indian economy was battling with the impact of the Asian Financial Crisis. The market was struggling, and the lack of confidence was evident.
In the 1999 election, NDA won, and as the results were within the expectation of the market, the Sensex rallied about 7% and continued the upward trend for the next three months.
However, within the next two years, it fell around 50% due to domestic and global factors such as the 9/11 attack. At the end of the NDA government tenure, the annual compound return was just 3%, and the absolute performance was over 14%.
After the 2004 election result, the market lost 15% in 2-3 trading sessions as the results were not according to the market sentiment.
Congress had formed a government while the market was hoping for an NDA government. But after the initial disappointment, the market saw a bull rally till late 2007 accompanied by a high GDP growth rate and foreign investment flowing to India.
The global financial crisis of 2008 brought an end to the bull market, but the market started recovering in 2009 by the time India went to the polls.
In 2009, UPA again came to power.
The market gained 17% in a single day, but as the second tenure of the UPA government was filled with scams, the market remained choppy.
For the whole economy, it was a troublesome period. The Sensex had gained 15.5% during the first three years. However, confidence in the government was low.
As the NDA came into power again with a full majority in 2014, the market was euphoric, the volatility reduced to 9.1% from 17.96% and the market rallied to a record high.
The expectation for economic reform and a stable government was the main reason behind it.
In the past four years, the Sensex has grown 40% which is being termed as slow growth because NDA was in the majority. Global factors such as high oil prices, a weakening Rupee are somewhat responsible for this.
We can also look at the performance of Sensex in the past four Lok Sabha elections in order to gauge the performance of what it has been like in the markets just before the voting year.
|Election Year||Sensex Points||Preceding Year||Sensex Points||Difference|
|September 3, 1999||4709||September 3, 1998||2918||1791|
|April 19, 2004||5800||April 17, 2003||2984||2816|
|April 15, 2009||11284||April 15, 2008||16153||(4869)|
|April 4, 2014||22359||April 3, 2013||18801||3558|
We can witness the following by looking at trends that have emerged six months after the election results:
|Year||Part in power||Consequence (After six months)|
|2004||UPA (United Progressive Alliance)||The Sensex shot up by 13 percentage points after the public viewed Dr. Manmohan Singh and P Chidambaram as reform-friendly.|
|2009||UPA (United Progressive Alliance)||The Sensex was at par with no major policy change as compared to UPA-1.|
|2014||NDA National Democratic Alliance||Policy reforms undertaken by the Modi government at the initial stage such as fiscal consolidation, curbing of inflation drove the Sensex by 9 percentage points|
Through the analysis, we see that the election impact is short-term on the market. The main factors which create an effect are economic reforms, policies, and stability.
The worry shouldn’t be around who will win the election but will it be an unstable coalition or a majority government.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.
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