Have you ever noticed that as elections draw near, the volatility in the stock market tends to increase? This is because Indian and foreign fund managers become quite enthusiastic before elections, analysing past trends to gauge how the stock market might behave in the coming months.
India is gearing up for the upcoming general elections, and based on previous market records and the current market situation, market experts suggest the possibility of another pre-election rally. But is this truly the case? Let’s understand.
What’s Happening?
You may have observed that the stock market is quite sensitive to new information, and elections are one of the biggest events for the economy and society in our country. Between 1980 and 2019, during the six months preceding 11 general elections, the Sensex provided an average profit of 14.3%. This indicates that the stock market has rallied amidst political uncertainty and change.
But the question arises, what’s the connection between the stock market and elections? Let’s understand!
Dependency on Election Results: It is believed that if election results are favourable for the existing government, the stock market tends to rise as it signals political stability.
Government’s Policies: If the government adopts better economic policies for development, it will generate positive sentiments in the market, leading to an increase in share prices.
Results of Exit Polls: The results of exit polls indicate the likelihood of a party winning. If the results suggest a victory for a party with better economic policies, stock prices will rise; otherwise, they may fall.
Expectations of Growth in Various Sectors or Industries: If the winning party plans to focus on infrastructure development in the country, stocks of infrastructure and real estate industries may rise.
Sensex Performance During Elections from 1980 to 2019
According to SAMCO Securities, in 2019, during the six months before the elections, the Sensex rallied by almost 10%, while in 2014, it provided a higher profit of nearly 16%. However, this is not always the case, as during the 1998 elections, the Sensex recorded negative returns of 9.3% before the elections, and in addition to this, during the six months before the 2009 elections, the Sensex saw a staggering rally of 59.8%.
The image shows Sensex’s performance during elections from 1980 to 2019.
What Does it Mean for Investors?
One reason for the recent surge is also the pre-election atmosphere apart from the budget released on February 1st. However, the danger of volatility looms large in this surge, as foreign institutional investors (FIIs) are selling. Money is being consistently pulled out of Asian markets.
As per Mint, approximately Rs 27,000 crores have been sold in Indian equity till January 2024. Therefore, investors need to conduct thorough research and make informed decisions before investing.
What’s Next?
According to a trading strategy report released by ICICI Direct, a pre-election rally may successfully take the Nifty to the level of 23,400 by June 2024.
The prediction of reaching 23,400 by June is based on the following reasons:
Effect of Election Year: It has been observed seven times in the last three decades that there is a rally of at least 14% after a decline in February-March of the election year.
Correction in Bull Market: Usually, after an 8% correction in a bull market, a new high is made. Currently, only a 4.5% correction (all-time high 22,124) has occurred, so 20,500-20,800 is a strong support.
Performance of Companies: Many shares are showing signs of a rally after a long period of consolidation, which supports the rise of the Nifty.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
