Editorial:Political Sensex

Mar 06 2014, 02:49 IST
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SummaryMarkets react to poll results in only the short-term

Given the manner in which the political class, in this case thanks to the AAP’s Arvind Kejriwal, has managed to make heavy weather of even something as routine as raising prices of natural gas, it is not surprising that the electoral calendar is as important as it is. Indeed, as compared to the Sensex which rose 12.8% in the last one year, FE’s index of politically sensitive stocks fell 5.4%—over 5 years, the politically sensitive stock index rose 29.5% versus 159.7% for the Sensex. The 27 politically sensitive stocks include those of RIL, ONGC and Tata Power—stocks where government policy is very important. The Sensex, of course, tends to suggest a far more robust picture of the economy than the GDP numbers do, as it comprises a handful of stocks, and of them, many have done exceptionally well due to the large depreciation of the rupee. What’s important, though, is whether the rise or fall in the markets around key election data—each time opinion polls have suggested a Modi victory in recent months, the Sensex has done better—will endure.

While the Sensex crashed 11% after the election results were announced in 2004 and surged 17% after the UPA came back to power in 2009, it is important to keep in mind the momentum of the markets before the elections—as Credit Suisse points out in a research note, elections don’t affect the long term direction of the market. In 2004, in the 3 months prior to the election results, the markets fell 9.7% and remained a negative 7.4% in the one month prior to the elections—so the Left Front supporting the UPA may have caused the post-results crash, but it was only reinforcing a negative momentum. Similarly, in 2009, the markets were up long before the results came in—they delivered a 7.9% return in the month before the elections and 26.3% in the 3 months prior. Once again, the sharp jump on May 18, was to be expected.

Liquidity is obviously an important reason for markets doing well—foreign institutional investors have been net buyers for 14

consecutive sessions this year, even as emerging market funds posted outflows of $3 billion for the week ended February 26. In February, FIIs bought $400 million worth of equities in India, the second-highest among all Asian emerging markets. But FII interest, it is obvious, is directly related to favourable policies of the government. It will

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