General elections and the markets

For equity markets, election is yet another big event. More uncertainty causes more volatility. The only difference between other events and elections is that the latter is watched very closely across the globe and the outcome can have significant ramifications.

Election outcomes have created some volatility around the time when results are declared but historically, when one observes the pattern, semblance of stability emerges with political formations settling down to form a stable government.

Let us take examples of the last three elections.

The NDA

In 1999, when the National Democratic Alliance (NDA) won the elections, markets surged by 17 per cent. This was soon followed by the NDA losing majority and fresh elections took place in October 1999. Due to the uncertainty, the market at that time lost close to 16 per cent. Post re-election when the NDA Government came to power for the second time, from November 1999 onwards markets started picking up and gained 23 per cent.

The UPA (I)

In May 2004, the United Progressive Alliance (UPA) government backed by the Left came to power on a thin majority and markets went down by 18 per cent (including the downfall of 12 per cent on May 15, 2004). By June /July 2004, the UPA Government announced policy changes despite pressure from the Left and found some new allies. The announcement of policy changes had a very positive impact on the markets and it moved upwards by 9 per cent and then started the biggest bull market in India.

The UPA Government came back to power with stable allies in May 2009. The Sensex rose by 29 per cent in that month (on May 18, 2004 markets went up by 15 per cent).

Reading between the lines

What does the above signify?

Markets and their participants watch for government formation very closely. In an era of coalition politics, any unstable government is given thumbs down.

Stability, either ways demonstrates the ability of the Government to continue policy reforms and the execution of these reforms.

Markets tend to discount fragile formations and especially ones where political discourse is anti-reforms.

Who is next

After the 2014 elections results, the market is expecting two scenarios .

Decisive Government – Either the UPA or the NDA will come to power. Consequently, the reforms process will continue.

Since the anti-reform narrative of certain socialistic segments, which are neither supporting the NDA nor the UPA, will not get enough ears (or votes), there could be a spate of unfinished agenda.

Also, this time the speed and quantum will be fast and furious to abate the continuous economic slippages in the last three-four years. This will lead to renewed confidence among global and domestic investors. They could allocate un-allocated weights to Indian equity markets. Domestic investors have stayed off from the markets in the last three-four years owing to the news of corruption and the lack of policy execution.

These investments could lead to the markets gaining significant ground, especially sectors that have been hammered down due to execution and policy delays.

The Third Front

There are talks of the third front forming the Government with a host of regional parties, but this Government will be fragile. Historically, these formations have not been able to hold their fort together for more than a couple of years (example – 1989 and 1996). This option could send jitters down investors’ spines.

They would start weighing the option of partial exits from the markets.

This could lead to significant losses in the equity markets. However, these may be temporary reactions. Equity markets are eventually driven by economy and corporate performance.

( The author is MD & CEO, Peerless MF .)

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