Lok Sabha elections: Why continuity would resonate better for markets than change

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Updated: April 16, 2019 7:17:10 AM

The stock market is known for its idiosyncratic ways, and, hence, it is hard to predict which way it will go. The indices are driven by a variety of factors, and most of the effects are for specific sessions, before it is business-as-usual (BAU) again.

The BSE Sensex can be tracked for specific months before and after the elections to ascertain any such patterns. (Representational image)The BSE Sensex can be tracked for specific months before and after the elections to ascertain any such patterns. (Representational image)

The stock market is known for its idiosyncratic ways, and, hence, it is hard to predict which way it will go. The indices are driven by a variety of factors, and most of the effects are for specific sessions, before it is business-as-usual (BAU) again. The monetary policy or Budget can spook the market but, normally, after a couple of sessions, it is mean-reverting. The same holds for corporate results or any major political upheaval or even natural disaster. At times, it is felt that the market movements before a major event like say elections could be indicative of the mood or expectations. In this context, it is interesting to examine the question ‘how have markets reacted to elections in the past’. Are there any patterns based on past information?

The BSE Sensex can be tracked for specific months before and after the elections to ascertain any such patterns. The last six elections have been considered here and plotted, where the monthly Sensex values three months prior to the Elections, the period of voting and two subsequent months after a new government came to power are mapped. In case the elections have been conducted in two months, they have been included separately. It must be stated upfront that this is an ex post exercise, and several factors affect the market indices such as FPI flows, monetary policy action, Budgets, currencies, fiscal path, global political and economic developments and so on. Often the final outcome, in terms of movement in indices, could be more due to these factors than elections. But with the benefit of hindsight, it is nonetheless interesting to map these movements with election outcomes and formulate patterns, if any, in market behaviour.

Some of the trends that emerge are very interesting. The first is that till the run up to the elections there is a tendency for the Sensex to show some bit of nervousness when the outcome is uncertain. In 1996 and 1998, the market moved both ways until the elections were conducted. In 1999, it was a direct upward movement which was replicated in 2009 and 2014, when the market looked confident. In 2004, which is when the UPA-1 came in, there was apprehension as the index looked downwards.

The phase of elections lasts for 1-2 months depending on when they commence. Except for the 2009 elections, the markets have tended to be cautious and shown a ‘nervous stable’ or downwards tendency as they wait to know the outcome. In 1998, there was confidence even though the outcome was, in a way, uncertain, given the factions that existed. In 1999, when the NDA government came to power, it had actually declined for the two months as the same government was not able to hold on to power in the previous elections. The scepticism continued in the 2004 elections when the NDA seemed popular, but ultimately lost to the UPA.

The third aspect is the post-elections scenario, where the market reaction can be gauged based on how they look at the result in terms of expectations from the new government voted to power. Here, there are some interesting trends based on ex post knowledge of what had transpired after the elections. In 1996 and 1998, there appeared to be a clear thumbs-down for the government, which was fractured as parties with differing ideologies and stances came together to form the government. The markets probably guessed that these governments may not last the complete term. However, when stronger alliances and a leader was chosen which gave a semblance of stability, the stock market reacted positively—the case in the last four elections.

The markets subsequently tend to cruise along the BAU path, where the other factors come back into play. The present trend looks different.

Compared with January, the Sensex moved downwards in February and then been resurrected in March though admittedly the strong FPI flows have boosted the market. The FPI action is normally based on extraneous factors, but the expected elections outcome could also influence them at the margin. It needs to be seen how the market reacts in April and May when the elections are conducted and the final response post the verdict.

The stock indices are considered to be an appropriate barometer of the sentiment in the country which includes the economic, business and political environment. While there is no overt tendency to move up or down on account of the elections, the market is efficient and absorbs the news that provides clues on the final outcome. As the nation, including market participants, forms a view on the outcome, there would be a tendency to react to the evolving scenarios that get sketched along the way. While a strong majority government which could be a single party or an alliance is desirable, the differing ideologies would also be influencing the mood swings.

If the past trends are to be reflective of the future, then the index should remain largely stable in the next two months when the elections would be on. It would be surprising if this does not materialise as the elections outcome is still unclear, given that there are no clear indications of a single party getting absolute majority. Depending on how the final government is formed in terms of alliances, the Sensex could take a specific turn in June and July. Continuity in the regime would definitely resonate well for the market while any change will cause more speculation.

The writer is Chief economist, CARE Ratings. Views are personal

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