Election year and the stock market return

A few months leading up to election time are filled with higher volatility which over time, especially after the election, subsides. In the last so many years market has behaved, rationally or irrationally, based on the comfort of political stability.

Election Year and the Investment Return

There is a weak correlation between Lok Sabha election and investment return. However, there is a high correlation between business profitability and investment return. Similarly, state elections are more relevant to local businesses impacting business profitability. A lot of state-level politics can have an impact on running businesses/factories in that state.

If you remember many years back, West Bengal did not let Tata manufacture Nano cars in the state. Tata Group had no choice but to leave West Bengal. It’s a different matter that Tata Group realised that Nano was a bad decision but still the entire event created an image of West Bengal as not a business-friendly state.

Investment community preference is towards political stability, irrespective of which party forms the government. As part of a stable government, we need a party to win majority Lok Sabha seats and that will ensure the next five years of stability. In a few days, we will start hearing a lot of exit polls and what each media house thinks. These exit poll results can have a short-term effect on markets especially if the indication is towards an unstable government.

I have no idea who will be forming the government, and I am pretty sure no one does. We also suffer from recency bias. We assume that 2019 will be repeated but who knows what. Atal Bihari Vajpayee was a great leader who made India a nuclear state and won the Kargil war but lost the 2004 election just because onion prices had skyrocketed. Interestingly, even Congress was not prepared for the 2004 win.

As an investor, I must maintain a neutral stand. I should be prepared for any outcome. I think if a stable government is formed that is expected by the market, we may not see a lot of market movement because a lot of that information is already captured in the recent bull run. However, if a stable government is not formed that will be against market expectations. This will lead to a short-term correction in the market. It would be silly for me to put a number to that correction. However, a smart investor will be prepared for any such correction. Business profitability and growth will drive valuation as it always does.  

Dr Kalam in his book, Ignited Minds talks about dreams, thoughts, and action. Dr Kalam also talks about developing a belief system. If we want to see our nation in the top league of nations in the world, we must also do our best and have the right belief system. A mere stable government will achieve nothing. Post Indira Gandhi’s assassination, Rajiv Gandhi came with an overwhelming majority but within a few years, India witnessed the most embarrassing moment. The world had no confidence in India’s debt repayment capability. IMF lifted gold from RBI facility. In fact, in the late 80’s, Pakistan was a much stronger country than India. In just three decades, India has achieved tremendous growth.

I hope we see a majority government at the centre and also see a solid opposition so that ‘We The People’ of India can benefit from being the largest democracy in the world.