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Elections play a pivotal role in shaping the economic and political landscape of any democratic nation, and India is no exception. They serve as crucial indicators of stability, influence market dynamics and capture the attention of strategic investors. The intricate correlation between elections and market movements can shape economic policies and sway investor sentiment.
The outcome of elections can lead to shifts in government, political ideologies, and subsequent changes in policies, financial priorities, and regulations, impacting various industries and the market as a whole. While elections often introduce short-term volatility, the lasting effects are determined by the economic initiatives implemented by the winning party.
One critical factor in assessing the market impact of election outcomes is whether the winning party secures a full majority or forms a coalition government. A government with a full majority can make decisive, unanimous decisions, whereas a coalition government may face political tussles, potentially resulting in policy paralysis.
In order to understand how the new government could impact the market, we have to go back to the market performance between 2009-2014, following the 14th Lok Sabha elections. With a coalition government in power, the market significantly underperformed during the half-decade. The Sensex was at the same level as that of its 2007 highs, meaning the markets had hardly moved between 2007 and 2014. But from 2014 to 2019, the Sensex almost doubled with the party in power in majority. This gives us an idea of the kind of governance structure the market likes.
Another critical factor is the market’s anticipation of the upcoming general election. We can assume that the market has extrapolated the recent state election results to predict the outcome of the general elections. That is evident from the market reaction after the result when Sensex closed more than 2 per cent up. The Sensex’s upward movement in response to favourable state election results reflects confidence in potential economic and policy continuity.
Investors keenly analyse the mood and preferences revealed in state elections, considering them early indicators for broader political shifts. This proactive stance allows investors to position themselves strategically, aligning their portfolios with anticipated political landscapes and mitigating uncertainty risks, showcasing the symbiotic relationship between political events and market dynamics.
Evaluating post-election market performance provides valuable insights. For instance, the period from 2014 to 2019, marked by a majority government, witnessed significant market growth, with the Sensex nearly doubling. This trend underscores the market’s preference for stable and decisive governance structures.
The heightened volatility leading up to elections results from the pervasive uncertainty until the release of pivotal exit polls. This heightened volatility leads to an increase in the India VIX. The India VIX shot up from 14 to 28 between mid-March to mid-May of 2019. In the years 2014 and 2009, the India VIX rose from 14 to 38, and from 36 to 56 respectively before the elections.
While long-term investors may weather the storm of increased volatility with relative ease, the same cannot be said for FnO players. During periods of elevated VIX, options premiums soar, greatly affecting these traders. It’s crucial for options traders, particularly those holding long-term positions, to bear this in mind when strategizing.
These polls serve as compasses in the political labyrinth, offering stakeholders clarity on current political undercurrents and guiding their understanding of the political landscape over the ensuing years.
The relationship between market behavior and election dynamics is symbiotic, with exit polls as intermediaries, bridging the gap between political uncertainty and market response. The interpretive power of these polls, combined with recent state election results, offers a comprehensive roadmap for investors navigating the complex terrain of evolving governance structures and policy directions.
Interest rates
Adding another layer to market dynamics is the expected rate cuts starting this year. As economic policies intertwine with political decisions, the market anticipates positive developments that could lead to a Sensex level of 78000, should these expectations materialise.
The interplay between elections and market dynamics in India is a nuanced and multifaceted phenomenon. Understanding historical trends, the market’s reaction to pre-election cues, and subsequent post-election performance provides investors valuable insights for informed decision-making.
The recent state election results have set the stage for anticipating the upcoming general elections, with exit polls offering a glimpse into the potential political landscape. Investors will closely monitor political developments, economic policies, and rate-cut expectations as the market navigates the volatile period leading up to elections.
Staying attuned to the intricate dance between politics and market trends is paramount in this dynamic environment. The future trajectory of the Indian market hinges on how effectively it adapts to the evolving political and economic landscape, making it imperative for investors to remain vigilant and responsive to emerging opportunities and challenges.
The author is CEO at Rupeezy
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