Is The Performance Of Stock Market Dependent On Election Results?

Markets have been roughed up on account of depreciating rupee, rising oil prices and NPA crisis. But much has been said about this now, right? With the run-up to the 2019 national elections, investors in the markets are worried about the volatility revolving around it. With a dig in the history of our Indian indices, the data suggests that the investors have a reason to rejoice, regardless of whether power changed its hands.

Let’s look at how the markets fared before and after the elections tenure.

1. Pre-election buoyancy: If you take a closer look at the stock market before the elections as shown in table 1.1., you will notice that between October end and April end markets have always given positive results in the last 20 years. If you look at the uphill movement, markets have gone up in the range of 6% – 20% in just 6 months.
   
2. Almost 100% growth between the two elections: If you look at the below table 1.2, markets have almost doubled between the two elections. This growth has been in the range of 83%-95% in the last five years. If historical data is to go by, this indicates that there is enough room left for the markets to go up to the tune of 30%-40% in the next 6 months. (This is a historical pattern and we are not trying to predict the Nifty levels for April 2019).
   
3. Markets have been party-agnostic: The data suggests that we witnessed the robust growth irrespective of the change in power of political parties. In 2004 and 2009, UPA was the reigning power, while NDA was ruling in 1999 and 2014. So, it doesn’t really matter which political party came to prominence and markets experience almost double growth between the two elections.
   
4. Markets need more than a stable government: If you look at the above data, Indian Indices Nifty surged by only 55% during the 4.5 years of NDA power i.e. from April 2014 – Present. This clearly indicates that a stable government with the full majority is not enough for the markets to go up. While one cannot undermine the impact of political events on the stock market, however, interlink between the two needs to be interpreted carefully. As a long-term investor, it is not a good idea to take decisions by solely linking the correlation between the two and many other factors need to be studied before taking a call.
5. The role of quality businesses: As highlighted above, Nifty has surged by 55% in approximately 4.5 years. While Nifty surged by only 55%, many stocks such as Eicher Motors, TVS Motors, Bajaj FInserv, Sterlite Technologies have delivered 5 times during the same bout. On the flip side, many stocks such as ONGC, BHEL, Bank of India, Sun Pharma, delivered negative growth in the last 4.5 years. It is not the election results, but the quality of stocks that propelled the growth in their earnings, which in turn drives the stock price up. These earnings are dependent on the magnitude of factors such credibility of management, consistency in cash flows, health of financial statements, risk management procedures amongst many other qualitative and quantitative parameters which can be gauged only after careful study. If the quality of the stock is sound, it is bound to grow irrespective of which political party is in power.
6. State elections: With the line-up of elections in the states of Madhya Pradesh, Chhattisgarh, Mizoram and Rajasthan in late 2018, many investors are wondering about their impact on national elections and the stock market. However, as we mentioned above, markets are party-agnostic. State elections are altogether a different ball game, where the impact is more driven by the state-level issues and challenges rather than the health of the overall economy.

So what should you do as an investor?

In the current situation, rather than getting confused by media news, free research reports, brokers tip, market rumors, just focus on these 2 things:

1. We are witnessing improvement in corporate earnings and many companies are declaring positive results by absorbing rising input cost and interest cost on account of rising oil prices and weakening rupee.
2. With new reforms such as IBC and other stringent guidelines by RBI, Banks are reporting lower NPA provisioning and we are witnessing revival in NPA recovery.

As we shared in our video rising crude oil prices and depreciating rupee are more of temporary issues and get stabilize soon. The recent RBI policy indicating a neutral stance by keeping the rates unchanged reiterates the fact that India’s growth story remains resolute.

The key to investing in stock market success remains simple: If you own a quality business with a long term view, you do not need to worry about the peripheral events such as elections, weakening rupee and other transient headwinds.

Identifying such quality stocks that can sustain the transient hiccups and even flourish in future can be challenging. This is because, one needs to study various quantitative and qualitative parameters, which can be quite tedious. However, this journey becomes easy if you have a credible financial advisor to identify and track the growth of these companies to help you emerge as a winner in any market condition.

Read more:  How Long-term investing helps create life-changing wealth – TOI.