Last Updated on December 29, 2021 at 12:19 pm
Do Lok Sabha Elections Influence Stock Market Returns? Does the market revive when a strong government assumes office? In June 2016, I had written an article titled, What drives the stock market: GDP? Earnings? Politics? RBI? I reproduce an extract from this article below due to the obvious topical relevance.
————–Begin Extract————–
Political Cycles as a market driver
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Want to create a complete financial plan? Learn goal-based investing? Exclusive access to our DIY tools? Increase your income with your skills? Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Each time a strong govt has taken office, the market tends to revive for the next 3-4 years.
whilst over the entire 30-year period, the Sensex has delivered 16% (in CAGR terms), in this initial three-year window following these three critical elections, it has delivered ~33% (in CAGR terms)
Ambit Reseach report Nov 2014 (no longer available)
These cycles can create as well as destroy wealth. Therefore, it may not be a bad idea at all to rebalance a year or so before elections. With an election looming, if the financial goal is only a few years away, it makes sense (to me) to shift out of equity.
————–End Extract————–
Analysis
Five years after the above was published (the Ambit report), and just before the next elections, we can now ask how well the predictions fared. Sadly the report is no longer available at their site and I do not have an offline copy. So we will have to make do with what I had written previously and the above-linked livemint report.
They had predicted a revival in infra and banking sectors. The banking sector did revive (The Nifty Bank Index has more than doubled in the last 5Y). However Nifty Infra is struggling.
The other major observation is that 2/3rd of the positive returns have come in the first 3Y after the election.
If we look at Sensex annual returns above (screenshot from VR) both 2009 and 2014 were strong years but the circumstances were different. Also, strong returns of 2014 were absent in the next two years (in variance with the Ambit report). There are multiple reasons for this and the major ones do not involve demonetization or the GST. See: 2015–16 stock market selloff. Although it cannot be denied that demonetization did at the very least hold back the market a bit.
In 2009, the recovery was triggered by huge FII inflow. DId they come back because of the re-election of the UPA government (dubbed UPA-II) or because they had no choice? Impossible to say now, but at that time it would be hard to deny that a strong mandate did help.
In 2014, it was more preservation of the rally that started in mid-late 2013. Again possibly due to the strong mandate for the BJP.
So although clear cut patterns are hard to spot (because they are perhaps absent), it would be difficult to argue that the Lok Sabha elections have no effect on stock market returns. In 2014 I remember India Vix the volatility index shoot up around this time (rectangle below). Surprised to see it head lower since early Feb. Of course, this is only an approximate measure of the next 30-day volatility.
On the other hand, one could say that stock market influence is short-term. However, a couple of bad years is all that is necessary to influence the long-term sequence of returns.
What can investors do?
People worried about the elections should have the guts to lower equity exposure and take a call after results are announced at the cost of missing a possible rally or steer clear of a crash. I don’t think many of those who are worried would do this.
Those who use technical indicators for tactical asset allocation anyway need not worry about events such as these. Those who use goal-based asset allocation also need not worry about these events as long as they have reduced equity allocation well in advance before a goal. If you want money in 2024 and hold 100% equity, you are asking for trouble. Do not go by what AMC’s and many financial advisors suggest regarding equity exposure. They are clueless.
In conclusion, I think each election year is unique and as usual, the best answer with regard to how the market will respond, as always is, I don’t know. So the only two options are:
- Ignore (if your goals are years away and stick to a plan). Have a strategy that does not depend on elections
- Act, reduce equity exposure significantly, especially if you need money “soon” (this could be 5-7 years). Have a strategy that involves lowering equity exposure prior to an election
As mentioned, the Lok Sabha elections and a new government’s decisions can influence short-term marker returns and these, in turn, do have a say in the long-term returns.
So, whichever option you choose from above, at the very least, consider rebalancing your portfolio (if necessary)
We have a unique situation where most stock investors are rather young and new to the market. So they are probably better off doing nothing except keep investing. Older investors with needs 5-7 away should probably play it safe and lower equity allocation.
Those in their 50s with retirement around the corner should also evaluate their strategy. If they do nothing, it is better to sit down and take stocks and ask what if the market crashes in May due to lack of a clear mandate?
An almost vertical movement (if seen zoomed out with past history) in the Sensex like yesterday (26 Mar 2019) over a few days can make everyone nervous.
It can come down as fast as it went up if no clear majority emerges. Remember the Karnataka polls? If a similar situation persists for a week, it will wipe out recent gains.
So again, if you are worried, do you have the guts to pull out an asset class on the rise (since late Oct 2019) without worrying about missing a rally or losing out to tax and exit load. If you do, then you have my respect. If you don’t then what is the point in worrying?
In every life we have some trouble
But when you worry you make it double
Don’t worry, be happy – Bobby McFerrin
Whatever you choose, do not sit in cash and wait. That is of no use: Want to time the market? Then do it right! Buying on dips is not timing!
My position: Currently my retirement corpus has about 58% equity (2% lower than desired) and my son’s education corpus has 62% equity( 2% more than desired). As of now, I am going to leave it as is. Whether it is a good move or not, only time will tell.
Check out the latest content from freefincal on Youtube
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: To get in touch, use this contact form. (Sponsored posts or paid collaborations will not be entertained.)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)