The Impact of Elections on Stock Markets: A Comparative Analysis of th... The Impact of Elections on Stock Markets: A Comparative Analysis of the US Read more

Summary

Political uncertainty indeed poses significant challenges for investors when assessing how elections impact Indian stock markets. Here's a deeper look at some of these challenges

Elections are major events that significantly influence stock markets, reflecting political sentiment and economic stability. In the United States, presidential elections occur every four years, and a pattern of subdued market performance emerges in the year preceding a presidential election. An analysis of the S&P 500 since the 1930s shows that both equity and bond markets tend to yield lower returns in this period.

On average, equities yield gains of about 8.5% over a standard 12-month period, but this figure drops to below 6% in the year before a presidential election. Similarly, bond markets typically yield returns of 7.5%, which decrease to around 6.5% in the same period. When a new party takes the presidency, stock market gains average around 5%, while retaining the presidency by the same party yields slightly higher returns, averaging 6.5%.

However, there have been instances of higher returns in specific periods, such as the Bush Senior era, Clinton's re-election, Obama's first election, Trump's first election, and Joe Biden's first election, showing strong stock market performance during the 12 months after the election.

Research in developed economies suggests that stock markets often perform better under Democratic presidencies and show enhanced performances in the second half of presidential cycles, particularly when Republicans are incumbents. These findings illustrate the complex relationship between elections, politics, and stock market dynamics.

Impact of Elections on Indian Stock Markets: A Closer Look
Elections in India have the potential to influence the stock markets, as they often lead to changes in government policies, economic priorities, and regulations that affect various sectors and companies. While elections can create short-term volatility, the long-term impact is largely determined by the economic reforms and policies implemented by the ruling party. Let's explore how Indian stock markets have been affected by elections.

Sensex Returns Across Different Prime Ministers:
An examination of Sensex returns during the tenures of different Prime Ministers in India reveals that election politics do not significantly sway equity returns. The overall trend in wealth creation remains consistently positive, with a long-term upward trajectory irrespective of the political leadership or party in power. However, there have been variations and specific points in time when this hasn't always held true.

Pre-Election Period Volatility:
In the periods leading up to general elections, Indian stock markets often exhibit increased volatility due to uncertainties surrounding election outcomes and potential policy shifts. Historical data shows that the average return one year before the elections is 29.1%, and in the month preceding elections, the average return is 6%. These statistics indicate robust market performance in the lead-up to elections. Notable exceptions include the year 2009, when a pre-election market decline of 24.9% occurred. However, this decline was followed by a significant 26.8% market surge in the post-election month. Therefore, despite uncertainties and a "wait-and-see" approach among investors before elections, historical data suggests that Indian markets have generally performed well during these times.

In conclusion, while Indian stock markets can experience pre-election volatility, the long-term trends in wealth creation have remained positive, irrespective of the political leadership. Elections may bring about short-term fluctuations, but the broader trajectory of Indian stock markets appears resilient in the face of political changes, often driven by economic policies and reforms.



Performance of Key Indicators During Elections

The post-event financial market analysis provides valuable insights into various sectors and indices:

1. 10-Year Benchmark G-Sec Surge:

• The 10-year Benchmark Government Security (G-Sec) experienced a significant 7.50% growth one month after the event.
• This surge suggests a potential flight to safety or increased demand for government bonds. Investors may turn to government securities during times of market uncertainty or in response to changes in monetary policy.

2. Top 50 Index's Consistent Growth:

• The Top 50 index exhibited consistent growth leading up to the event, with an impressive 17.81% increase six months before.
• However, it faced a slight decline of -0.26% one year after the event. This could indicate market corrections or changing investor sentiment.

3. Midcap 100 Index's Strong Post-Event Performance:

• The Midcap 100 index showed robust performance post-event, with a remarkable 28.39% rise one month after.
• This performance suggests that mid-sized companies were favored by investors and likely outperformed during this period.

4. Smallcap 100 Index's Remarkable Turnaround:

• The Smallcap 100 index experienced a remarkable turnaround.
• Despite a -13.29% decline one year before the event, it surged by 31.88% one month after.
• This significant recovery could indicate renewed interest in smaller companies or the perceived undervaluation of these stocks leading up to the event.

These insights highlight the dynamic nature of financial markets and how different sectors and indices respond to economic events. Investors should consider these trends and performances when making informed decisions in the ever-changing landscape of the financial markets.

Sectoral Analysis of Indian Stock Markets During Elections

The data offers valuable insights into the performance of various sectors in the Indian stock market, both before and after elections. These insights are quantified as percentage changes across specific time intervals:

Post-Election Stars:

1. Pharma Sector: One month after the election, the Pharma sector saw remarkable growth, with a substantial 30.54% increase. This makes it the highest-performing sector during this period, possibly due to positive sentiment and industry-related factors.
2. Auto Sector: The Auto sector also displayed strong performance post-election, especially six months after, with an impressive 19.30% increase, indicating positive investor sentiment.

Consistent Performers:

1. Private Bank Sector: The Private Bank sector showed steady growth across most time frames after the election. This suggests resilience and strong investor confidence in this sector.
2. CPSE Sector: Similarly, the CPSE (Central Public Sector Enterprises) sector demonstrated consistent growth, indicating stability and ongoing investor interest.

Underperformers:

1. IT Sector: The IT sector faced challenges post-election, experiencing a significant decline of 19.61% one year after the election, despite being one of the top-performing sectors a year before.
2. Metal Sector: The Metal sector remained in negative territory for most periods, with the most significant drop of 7.70% one month after the election. This indicates a challenging environment for this sector.
3. Realty Sector: Despite a sharp decline of 23.75% one year before the election, the Realty sector managed to recover somewhat post-election, showing a positive growth of 10.89% one year after. This suggests a potential rebound or renewed investor interest.

Mixed Bag:

1. Financial Services Sector: The Financial Services sector exhibited a positive trend post-election, particularly one month after, with a growth of 14.39%, indicating investor confidence.
2. Bank and PSU Bank Sectors: These sectors, which had strong performances before the election, witnessed declines in the subsequent periods. The Bank sector even went negative with -1.77% one year after the election, showing mixed performance.
3. FMCG and Infrastructure Sectors: FMCG (Fast Moving Consumer Goods) and Infrastructure sectors displayed relatively stable performances with minor fluctuations, indicating investor trust in their long-term prospects.

These insights highlight the dynamic nature of sectoral performance in the Indian stock market during election cycles. Investors should consider these trends when making investment decisions, taking into account the resilience, challenges, and opportunities within different sectors.

Analysis of Investing Factors in Indian Stock Markets During Elections

The data reveals interesting trends in various investing factors within the Indian stock market during election cycles. These trends shed light on how investors approach different investment strategies during times of political uncertainty:

Alpha's Strong Comeback:
1. Alpha Factor: This factor, representing excess returns compared to a benchmark index, made a remarkable recovery. After experiencing a 13.80% decline one year before the event, it surged by an impressive 43.47% one month after. This suggests strong investor confidence and the possibility of outperformance relative to the benchmark during this period.

Consistent Dividends:
2. Dividend Factor: The dividend factor, often associated with dividend-yielding stocks, exhibited consistent positive growth throughout various periods, especially after the event. This may indicate a preference for dividend-yielding stocks during times of uncertainty, possibly due to their inherent stability.

Volatility's Mixed Bag:
3. Volatility Factor: The volatility factor, typically representing stocks with significant price swings, demonstrated strong performance, particularly one month after the event, with a significant increase of 28.42%. This could suggest a more volatile market phase during that period or the profitability of trading volatile stocks.

Quality's Steady Growth:
4. Quality Factor: This factor, typically linked to stocks of high-quality companies with strong fundamentals, displayed modest but steady positive growth, especially after the event. This may indicate investors seeking safe havens in companies with strong fundamentals during uncertain times.

Momentum's Standstill:
5. Momentum Factor: Interestingly, the momentum factor, associated with stocks displaying recent upward price trends, remained unchanged across all periods. This could be a data anomaly or suggest that momentum strategies were neither particularly profitable nor unprofitable during these times.

Value's Slight Recovery:
6. Value Factor: The value factor, which typically involves undervalued stocks, showed minor fluctuations. It experienced negative performance one month after the event but managed to recover slightly in the subsequent periods. This implies mixed sentiment towards value stocks, possibly influenced by various factors.

These insights indicate that investors may adjust their investment strategies during election cycles, with varying degrees of focus on factors like alpha, dividends, volatility, quality, momentum, and value. It underscores the importance of considering different investment approaches based on market conditions and investor preferences.

India's economic and stock market performance is indeed not solely dependent on elections. The country's economic policies and reforms have followed a broad pro-growth trajectory, characterized by deregulation, liberalization, and privatization since the 1980s. While different governments have prioritized various aspects of economic reform, India has consistently pursued a market-driven approach, creating a stable economic and political environment for investors. The completion of full terms by governments since 1999 highlights political stability, providing investors with the certainty they seek.

Key Points:

1. Economic Reforms: Indian governments, regardless of their political affiliation, have emphasized economic reforms, infrastructure development, and foreign direct investment (FDI). While specific policies may differ, the overall direction has remained pro-growth.

2. Political Stability: The fact that governments have consistently completed their full terms since 1999 highlights India's political stability. Known uncertainties are manageable for investors, while unknown uncertainties pose more significant challenges.

3. Resilience to Government Changes: Long-term market performance in India has shown resilience to government changes. Even when unexpected election outcomes led to market corrections, the strength of economic reforms and a robust private sector have allowed markets to bounce back and maintain a positive trajectory.

2024 Elections and Market Impact:

1. Varied Market Responses: The impact of the 2024 elections on Indian stock markets could vary depending on the election outcomes. A clear majority win by the current government is predicted to lead to a market gain of 0% to 5% in the following three months.

2. Possible Scenarios: Analysts have outlined various scenarios. If the BJP loses in 2024, markets could correct by 10%. If a coalition government is formed without a clear majority, market falls could range from 5% to 25%. The most negative scenario involves the current government losing, leading to a weak coalition with the leading party having fewer than 200 seats, resulting in a drastic market crash of up to 40%.

These scenarios illustrate the potential market responses to different election outcomes. It underscores the significance of political stability and the government's approach to reforms, both of which have long-lasting effects on India's economy and stock markets. Investors should consider these factors while assessing their investment strategies in the run-up to the 2024 elections.