Stock markets are generally seen as an indicator or predictor of the economy. How the economy in a growing country like India will pan out in the future depends a lot on government policies and reforms.
General election 2019 results are around the corner. The election has always made investors jittery. There is always fear to creep due to uncertainties associated with elections. But why the elections are considered so important for stock markets.
Election & markets
It is a known fact that whichever party comes into the power in the General Election 2019, they would be responsible for framing economic policies of the country. Stock markets are generally seen as an indicator or predictor of the economy. How the economy in a growing country like India will pan out in the future depends a lot on government policies and reforms.
The general perception also is that if there is a stable government at the Centre, especially a government which is known for the development and investor-friendly policies, then the economy will be on a sustainable growth path. The election may impact the market for the short-term, but in the long-term, it is the policy decisions by the government, which matters the most.
The outcome of the election will determine the growth trajectory of India. The stock market takes a bullish or a bearish trend depending upon the changes and announcement which is mostly done by the elected government based on infrastructure, privatization, levying of tariffs, etc.
Investors always prefer a clear majority and if a current government is re-elected with a clear majority like in 2014, the markets will show a short-term uptick due to positive sentiments. If a party falls short of a majority but still manages to stitch up alliances and form a government, the markets will be volatile for a while but will recover once a stable government is formed.
If there is no clear winner and there is clearly a fractured mandate, the markets are likely to fall and may not recover till a stable government is formed at a Centre. The bottom line is that irrespective of which government comes to power, the stock markets like stability. When there is uncertainty, the stock markets react in an adverse manner
Let us have a look at the Sensex performance for the last 30 years. During these 30 years, India had a majority, coalition and minority government.
So, all in all, the past data suggests that there’s always been an uptick in the market sentiment posts the general election results, no matter which party that comes to power. This can be explained by the fact that India’s reform programme and economic direction move in the same direction, notwithstanding who is in charge.
During the Janata Dal rule of 1989-90, SEBI was set up (Capital Controller of Issues was dismantled), restrictions on capital goods imports were eased and serious thought was given on trade policy reforms. If disinvestment was started by the Congress, NDA continued it. If insurance sector reforms were started by the NDA regime of Vajpayee, it was continued by Manmohan Singh and carried forward by the Modi government. Aadhaar was introduced in UPA time and it was enhanced by NDA with the Jan Dhan-Aadhaar-Mobile (JAM) concept.
What should an investor do
Investors with a long-term investment horizon should not worry about the election results impact on the stock market and try to time the markets. Even if there is a fractured mandate, the markets have in it the character to absorb the losses and be on a growth track again. The prudent investor should have belief in the India growth story and rely on the fundamental principles of investing.
The writer is senior VP & head, Investment Analytics, Bajaj Capital