Election Impact on Financial Market

Election

Indian Political Landscape

Indian politics is a fascinating tapestry made up of many different strands of ideology, history, culture, and governance. India, the world’s largest democracy with a population of over 1.3 billion, has seen significant political change since gaining independence in 1947. Indian politics have their origins in the country’s colonial past under British domination. Founded in 1885, the Indian National Congress (INC) was instrumental in organizing the populace against the oppressive rule of the colonists. India’s victory in the independence war came to an end in 1947. The leadership of well-known individuals like Sardar Patel, Jawaharlal Nehru, and Mahatma Gandhi shaped the political landscape.

Indian politics have undergone several notable stages since independence:

1. Nehruvian Era: The initial years were distinguished by the goals of India’s first prime minister, Jawaharlal Nehru, who prioritized industrialization, nation-building, and foreign policy non-alignment.
2. Emergency and Opposition Movements: Indira Gandhi imposed an autocratic state of emergency and an autocratic rule during the 1970s. A wave of opposition movements ensued, which led to her downfall in 1977.
3. Liberalization and Coalition Politics: With globalization and economic liberalization, the 1990s were a pivotal decade. As regional parties’ influence grew, coalition politics rose to prominence.
4. Rise of the BJP: The BJP, a right-wing party that places a strong emphasis on Hindu nationalism, rose to prominence in the late 1990s and early 2000s. As a result, the National Democratic Alliance (NDA) was formed, signaling a break from Congress’s hegemony.
5. Digital Age and Youth Involvement: The emergence of the digital age opened up new channels for political mobilization and engagement, especially for young people. The strength of grassroots activism was demonstrated by movements like the India against Corruption campaign and the emergence of the Aam Aadmi Party.

Currently, 17 States are under BJP rule. But earlier in the year, the party suffered a blow when it lost Karnataka, the only state in the south. The BJP successfully seized control of Rajasthan and Chhattisgarh from the Congress party in the recently held State elections. Other regional parties continue to hold power in Mizoram, Odisha, Andhra Pradesh, and Tamil Nadu, while the Aam Aadmi Party (AAP) is in charge in Punjab and the Trinamool Congress is in charge in West Bengal. The only state controlled by left-leaning parties is Kerala. In the nine elections that were held this year, the Congress won two and the BJP five.

During election seasons, the Indian stock market frequently serves as a gauge of both political mood and economic stability. Investors keep a close eye on election developments because the results may have a big impact on the dynamics of the market.

Elections are a major event that, because of their regularity and fixed schedule, can have a big impact on stock markets. The political atmosphere and economic stability of a nation greatly depend on these events, and investors keep a close eye on the results in order to comprehend market dynamics. Some even try timing the market at these times. But because there are a lot of moving parts and a complicated relationship between elections and stock markets, it’s important to know the ins and outs of the situation before making an investment.

There is usually more volatility in the stock market before general elections. Stock prices may change if you become cautious and take a “wait-and-see” attitude. This volatility may be exacerbated by uncertainty regarding the results of the election and prospective changes to policy.

In the year preceding the election, the average return was 29.1%. *We have included returns for the 2019 elections up until March 5, 2020, because COVID-19 caused the market to crash after that date. The market returned 6% on average in the month leading up to the election. These figures imply that the market did well in the year leading up to the election. With the exception of 2009, when the market saw a 24.9% decline, the market has produced positive returns in each of the other two years (from 1999 to 2019). Nonetheless, the market’s 26.8% increase in the month following the election more than offset the 2009 pre-year decline.
Decisions made by foreign investors are also influenced by general elections. Foreign investors evaluate the political and economic stability prior to making an investment in Indian stocks or taking a loss. While political instability can result in capital flight, a stable government can draw in foreign investment.

Past Experience (Case Study)

2018 saw the economy begin to recover from the shock of demonetization. The IL&FS credit default scandal hurt the home markets. A shortage of liquidity hit the NBFC industry as a result of the crisis. All non-banking stocks were hardest hit, with the majority of them experiencing losses by the final quarter of 2018. The Nifty hit 11,000 in January before plunging to 9,998.05, the lowest point of the year, on March 23. On August 28, it recovered to reach the highest point of the year, 11,738.5. After that, the Nifty dropped to roughly 10,000 in October before slowly rising to close the year just short of 11,000 points. For the year, it generated returns of 4.09%.

With a resounding win, the Bharatiya Janata Party (BJP) formed a stable government headed by Prime Minister Narendra Modi. This result was well received by the stock market, as benchmark indices like the Sensex and Nifty quickly hit all-time highs following the announcement of the election results. The expectation of continued policy and economic reforms helped to boost investor confidence.

1996 to 1998
The years 1996–1998 were marked by political unrest and the Asian Financial Crisis.
Three different prime ministers and instability contributed to a decline in market confidence that hurt the Indian rupee and export-oriented industries.

1999- NDA in Power
After the National Democratic Alliance (NDA), led by Atal Bihari Vajpayee, won the 1999 election, the market felt more stable. The results were expected by the market, so the Sensex gained nearly 7% and continued to rise for the next three months. As a result, the GDP increased by roughly 6-7%.

2004- Congress Back to Power
The market fell 15% in the two to three trading days after the 2004 election as a result of the results not matching the mood of the market. Congress had formed an administration, not the NDA that the market had hoped for. The market saw a bull run after the initial disappointment that continued until late 2007. 

2009-Congress Continues for a Second Term
In 2009, the UPA came back to power.
Even though the market rose 17% in a single day, the multiple scams that marred the second term of the UPA government kept it unstable.

Modi Waves-2014
The market’s sentiment improved dramatically in 2014 after the NDA won a decisive majority and reclaimed control.
The volatility of the market dropped from 17.96% to 9.1%, suggesting a more stable trading environment as a result of the lower volatility. A notable upswing also occurred in the stock market, which reached all-time highs. The Bharatiya Janata Party (BJP) emerged victorious and installed Prime Minister Narendra Modi in charge of a stable administration.
When the election results were announced, benchmark indices like the Sensex and Nifty immediately reached all-time highs, indicating that the stock market was pleased with the outcome. An additional factor contributing to investor confidence was the expectation of sustained policy and economic progress.

Impact

The response of the stock market to election outcomes is quick and frequently dramatic. Positive market reactions are often the result of investors feeling reassured by a stable government with a clear mandate. On the other hand, market volatility may result from a disjointed or unclear election result. Following election results, the average one-month return is -(0.2)%, and the average one-year return is 12%. Investors search for government stability.

According to a recent analysis by Morgan Stanley, in the event that the incumbent government secures a resounding victory in the 2024 elections, the market may rise anywhere from 0% to 5% in the three months following the vote. The market could drop by 5% to 25% if the government is unable to secure a clear majority and a coalition government is established. The stock market could plunge by a staggering 40% if the BJP government loses and the leading party receives fewer than 200 seats, forming a weak coalition that would mean little power. The worst-case scenario would apply.

Economic policies are often shaped by the party that wins elections. A political party’s economic agenda is carefully examined by investors because certain industries and sectors may be impacted by changes in regulations, taxes, and economic reforms. This could have an impact on the stock prices of businesses in these industries.

Potential negative impacts: 

Market volatility may result from an uncertain period that is sparked by elections. A common cause of this uncertainty is the potential for changes to laws and regulations. Because of this, investors—especially those from overseas—may take a cautious stance and postpone or reconsider their investment choices until the political environment is more clear.

There may be notable swings in asset prices during this period due to the unpredictability of market movements. Politicians frequently make populist-oriented promises during election campaigns. While short-term gains may be the main goal of these populist policies, long-term economic reforms that can eventually provide investors with a stable and predictable environment may not be given priority. Consequently, these policies may have a negative impact on the economy and deter long-term investors from making investments in the nation.

Political parties often divert their attention from policymaking to campaigning during the pre-election season. This can affect how decisions are made and result in major delays when applying for regulatory approvals and other important procedures that investors and businesses need to go through. Because of this, the unpredictability of the pre-election period can have a big effect on the state of the economy as a whole, which can hinder the expansion and advancement of different industries. Certain industries—like mining and infrastructure—may be subject to stricter inspection and regulation during election seasons. As a result, when trying to get project approvals, these sectors might run into delays and problems.

Potential positive impacts: 

Political parties frequently try to win over voters during election seasons by putting forth policies that encourage investment. These regulations might focus on enhancing infrastructure and fostering an atmosphere that is conducive to business. Therefore, these assurances may momentarily boost investor confidence.

Developing relevant infrastructure projects is often necessary to attract investors and optimize the potential of a region or locality. Prioritizing important infrastructure projects like energy grids, communication networks, and transportation systems can help parties generate new investment opportunities and foster the expansion of related industries.

This may result in a rise in economic activity, better living standards, and an environment that is more appealing to investors. The restoration of confidence and political stability can be greatly impacted by an election that produces a definite and unambiguous result. Consequently, investors are reassured regarding the consistency of long-term policies, which can play a significant role in their choice of strategy.

Other Factors

When it comes to the overall political landscape, national elections typically have a bigger impact than state elections. Although both kinds of elections hold significance, national elections possess a greater reach and have the potential to significantly influence the course of the entire nation. The state of the economy prior to an election can have a significant impact on mitigating the adverse consequences of uncertainty.
The impact of uncertainty can be lessened by a robust economy prior to the election. International factors, such as trade wars or recessions in different global markets, also have an impact on investment decisions. Thus, it is essential to closely monitor the sentiment of the global market in order to make well-informed investment decisions. During elections, a number of factors impact the investment climate in India. The short-term outlook is anticipated to be marked by heightened market volatility and uncertainty.

On the other hand, the outcome of the election and the policies implemented by the new administration will determine the long-term effects. The result of the elections will have a significant impact on how the Indian economy develops in the future. A complex interplay of national and international factors affects the investment climate in India.

Investment and Election

Macroeconomic trends and policies have a longer-term effect on market performance than election results, which may have an immediate impact on market volatility. Therefore, it would not always be advantageous to base financial decisions solely on the outcome of elections. Investors should focus on long-term strategy and maintain a diversified portfolio during election cycles instead of attempting to time short-term market movements. By doing this, investors can ensure the security of their assets and the achievement of their financial goals.

Short-term stock market volatility may also result from election-related events like debates, rallies, and opinion polls as investors respond to shifting political dynamics. As a result, in order to make wise choices, investors must remain informed and modify their strategy for investing throughout election cycles. A wide range of businesses and sectors may be impacted by changes in political parties, administrations, and ideologies, which may also have an impact on laws, economic objectives, and government policies. Even in cases where elections initially cause instability, their long-term consequences are dictated by changes in the economy. Investors must carefully analyze and evaluate the potential effects of these changes on their investment portfolios in order to make informed decisions that will ensure long-term development and stability.

Election-related uncertainty frequently results in possible volatility in the stock market. The following techniques can aid investors in successfully navigating it:

1. Stay informed
It is imperative to remain informed about expert analyses, election updates, and political developments. Making educated decisions and changing your investment strategy can be facilitated by having a thorough understanding of the possible effects of various outcomes.

2. Diversify your portfolio
One of the most important investment strategies to reduce risk during erratic times is diversification. Ensure that the assets in your portfolio are distributed among various industries, geographical areas, and asset classes. This lessens the volatility brought on by the election’s effects on your portfolio as a whole.

3. Long-term perspective
Elections often cause short-term market fluctuations, but these usually settle down over time. As a result, it’s critical to keep an eye on the big picture and refrain from acting rashly in response to transient market fluctuations.

4. Regular portfolio review
Certain industries or assets may gain more favorable conditions than others as the election progresses and new laws or political shifts take shape. You can make changes to the portfolio to better align it with your investing objectives and the shifting market conditions by regularly reviewing it.

Conclusion

The dynamic arena of Indian politics is the confluence of shifting ideologies, diverse demographics, and historical legacies. India continues to have a strong democratic spirit and resilience despite persistent challenges like identity politics, corruption, and uneven development. India’s political development is a reflection of the country’s continuous pursuit of development, equity, and inclusive governance. India, the largest democracy in the world, will continue to influence not only its own political discourse but also that of the rest of the world. There is short-term volatility in the Indian market both before and after the election. However, the government’s ability to implement policies and foster an environment that is favorable for businesses will ultimately determine the course of events in the long run.

To lessen the volatility brought on by elections, investors should approach the stock market from a long-term perspective, concentrating on fundamentals and diversification. Additionally, keeping up with election-related developments and their possible effects on the economy can assist investors in making wise choices when election cycles are underway. Even though general elections have a big influence on the stock market, successful long-term investing in this vibrant and dynamic democracy requires careful planning and a focus on the wider economic picture.

Elections frequently cause the stock market to become more volatile and uncertain, making it more difficult for investors to make wise decisions. To maintain a solid financial foundation during such times, it’s critical to plan thoroughly, optimize the portfolio, and keep up with the most recent advancements.

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