Election results – What they could do to markets

The biggest event in the last 5 years (due to arrive in April) is the 17th Lok Sabha elections. On the cusp of this event, we have witnessed a lot of apprehensions amongst investors on what could be the potential impact of a weak government mandate (such as a hung parliament and weak coalition) on the market. Whereas it has been proven time and again that despite any election mandate, India has grown its economy as well as its corporate earnings at a healthy pace. Strong corporate earnings growth has been the backbone of returns for Indian investors and nothing else matters as far as wealth creation is concerned in the long term.

But having said that we have tried to allay the investor fears of losing wealth in the event of an adverse election outcome. We analyzed the returns of the market 6 months prior to and after the elections for each election held since 1996. We have used the BSE500 as a barometer of market sentiments since it is a broader index although this data is available only from 1999. For the market returns prior to that, we have used BSE Sensex.

The results of our analysis are as follows –

Before you read our observations and data, we would like to allude to the possibility that the above market outcomes could be purely co-incidental and may not be linked to the election results. We are thus highlighting the actual data and not in any way suggesting that it is a cause-and-effect relationship. To that extent, the interpretation of the above data is the prerogative or responsibility of the reader.

Key takeaways from the above data: –

  1. Post a weak coalition mandate in 1996, the markets dropped by about 15.6% over the next 6 months.
  2. In 1998 the NDA was 18 short of the majority and the leadership was dependent on outside support. The government fell in a year. The market gave flat returns for the next 6 months.
  3. In 1999, the mandate was strong in favor of the NDA which secured a majority. The market gave a 23.6% return during the next 6 months.
  4. In 2004, UPA secured maximum seats but required outside support. The market gave barely 5% returns in the next 6 months.
  5. In 2009, UPA received a strong mandate and the market turned 19.4% in the next 6 months.
  6. Finally, during the 2014 elections, the NDA secured a thumping majority. The markets gave 18.1% returns in the next 6 months.

If one were to even believe that there was a cause-and-effect relationship, the above data just goes to corroborate that elections have not really had a major negative impact on equity returns on most occasions. But they have had a more positive impact if the mandate is strong for obvious reasons.

In fact, market returns for BSE500 in last 20 years have been at a CAGR of 14.3%, and for BSE MIDCAP in last 16 years have been at a CAGR of 18.9% beating most asset classes (both are from the date from which data series is available). Need we say more.