2024 Elections and Its Impact on the Stock markets: -

2024 Elections and Its Impact on the Stock markets:

The Stock Markets in India are shown to do fairly well 1 year before the elections.
In the last 25 years, this trend has played out almost every time (sparing some unforeseen cases) [1].

For eg: When Shri Atal Bihari Vajpayee took office as the prime minister of India, the 1 year return of the stock market prior to the election was close to 51%.
Similarly in 2004, there was a 98% up move in the market in 1 year.
And again a 16.6% return in 2014.

So therefore the data tells us that on an average the stock market gives an up move of close to 30% before the election year.

In this blog post, we will be discussion about a few critical points that you MUST know about the relation between the elections and the stock market returns:

How have Stock markets performed in the past before elections?
Why the governments have the incentives to keep the stock market alive
What are the actions taken by the government prior to the elections (Driving forces, specific actions, ?
What are some key points to keep in mind during such a situation as a sensible investor? (should you invest in the stock market today, what does the current market dynamic look like)
What will the situation look like post elections? (How to prepare your portfolio, Actions going forward, Debt problems, Alternate options, what should you buy and sell)

How have Stock markets performed in the past before elections?

Let’s take a deeper look at the performance of the stock market prior to an election year.

The cases seen in 2009 was an anomaly since this was post the 2008 Financial Crisis in the US. This crisis rippled across and affected the Indian Stock Market returns as well.

Similarly, the case in 2019 had not played out a similar 30% return could have been witnessed in this period as well.

Hence in a data driven sense, it looks like it’s a good time to invest before an election year.

Now let’s look at why the stock market gives good returns around 1 year before the elections.

What incentives do the governments have to keep the stock market alive before elections?

Let us break down what an election is primarily about. For a political party to win the elections, they need to secure votes.

What would be the best way for these parties to secure these votes?
What drives people to vote?

While this answer could be development, projects etc., but a broader more likely reason would be the broad sentiments in the economy, more specifically the market sentiments.

So if it were to happen that the market sentiments before an election turns positive, this in turn would lead to an increased number of votes for the existing ruling party.

Therefore it would make sense for the state governments to do everything in their power to support the stock market during this period of time.

What are the actions taken by the government prior to the elections? (Driving forces, specific actions)

As it stands, the current interest rates in the Indian Economy is around 6.5% [2].
Higher interest rates lead to lesser liquidity and slower growth in the economy.

So, the best method for the government to boost the market sentiments is to decrease the interest rates in the economy,
This will likely play out not just in India but also in the US, since they are also edging closer to their election cycle (which will be next year).

If the interest rates are cut, this will lead to increased flow of money in the economy, more specifically there will be an increase in the flow of money into the stock market.

Lets understand this through a simple example:
If you are given an Fixed Deposit at an interest rate of 7.5%, you are likely to keep your money fixed in FD. This leads to decreased liquidity in the market.

Now if the interest rate of the FD is cut to 5%, you are less likely to put new money into an FD. This liquid money is more likely to be redirected into other asset classes. This will lead to an increase in the market value of these assets.

If you are a serious investor and are looking for more deeper commentary on concepts related to Macroeconomics and Stock Market, you can join my Youtube Member Community where I give more such insights.

What are some key points to keep in mind during such a situation as a sensible investor? (should you invest in the stock market today, what does the current market dynamic look like)

As of 14th September 2023, the market is already standing at around 20100 levels.

Now, let us take a look at how the broader sub-indices have performed:

1. Large Cap:

Nifty 50 (which is the combination of top 50 large cap companies in India have given a run up of almost 19% in the last 6 months [3].

2. Mid Cap:

Nifty Midcap 100 (combination of the top 100 midcap companies) have given a run up of almost 38% in the same time period [3].

3. Small Cap:

Nifty Smallcap 250 (combination of the top 250 small cap companies) have given a run up of almost 43% in the same time period.

So, the data above tells us that in the short term (pre-elections), large caps are more likely to go up.
Small caps and Mid caps have already done pretty well and additionally the broader market sentiments are primarily driven by the Nifty 50 and Sensex, which comprise of Large cap stocks.

So a more likely scenario where market sentiments will be raised will be driven by the outperformance of the Large Cap stocks.

Now, what are the expected growth levels of Nifty 50 pre elections?

As per the chart below, a cup and handle pattern is being created, so if this technical pattern plays out, the likely target will be somewhere around 21500 – 22000.

It is important to note that even though there is a possible 8% gain still left to be made, this is not a tradable market.

This is primarily because the volatility in the market (price movements and fluctuations) are a lot more during the election year. This gives a large trading range and can cause issues for a trader in the market.

This can be better visualized through the VIX chart, which primarily tracks the volatility in the market.

The chart below clearly shows that during election years, the volatility in the market is generally seen to go up [4].
Note that 2020 was an anomaly year which caused such high volatility in the VIX chart.

What other factors can drive the pre-election stock market rally?

1. Strong FII (Foreign Institutional Investors) and DII (Direct Institutional Investors) Data:

FIIs generally consist of foreign investors that put their money into another country’s financial markets.
DIIs are local entities like mutual funds that invest money into their own county’s markets.
The data below shows us that over the last few months FIIs have been net buyers [5]. They have cut positions in August but the trend is likely to continue going forward.
Similarly, DIIs have also been net buyers and are accumulating more positions in August as seen in the chart below [5].

2. Global Interest Rates cut:

Interest rates are likely to get cut not only in India but also globally (in the US)
This will give more incentives for FIIs to keep investing in the Indian Markets.
Interest rate cuts will also increase the flow of money into the Stock Markets as previously discussed.

3. Economic Strength in India:

India’s economy is growing strongly.
As per the GDP growth chart, India is set to grow at 9.1% GDP growth rate which shows a positive trend. [6]

4. Short Term Underperformance:

In the last 2 years, the markets have only given a run up of 7-8 %.
So in a pre-election year, if the government wants to bring the markets up, they can very well make it happen.

If you are a serious investor and are looking for advanced techniques with a focus on better returns, join my Youtube Community where I give live and timely updates on the Stock Market.

What will the situation look like post elections? (How to prepare your portfolio, Actions going forward, Debt problems, Alternate options, what should you buy and sell)

What should you do once the market hits the target of 21,500?

Post elections, there are 3 main factors that will determine what the future outlook of the stock market will be?

1. The Type of the New Government:

Markets cope well with decisiveness. So, a strong majority government will have positive impacts on the stock market post elections.
This helps the people better assess the type of policies and actions that will be taken going forward.
On the flipside, if the following government is not as strong then it could have adverse effects on the market.

2. Overall Market Conditions:

Once the market hits the target of 21500, this could mark a rally end.
At these levels, a 10 year time period from 2014-2024 would give out a CAGR of 14% return from the stock market.
At this stage, the market will not look undervalued at the 21500 levels.
This coupled with the high debt levels that the government has to bring down, could possibly lead to higher interest rates or higher taxations post elections.

3. Alternative Options:

There will be other asset classes such as Real Estate where the buying options could be better.
This could mean that at this stage, it could be better to start building your real estate portfolio a little more aggressively, alongside your stock portfolio.

If you are a serious investor and are looking for advanced techniques with a focus on better returns, join my Youtube Community where I give live and timely updates on the Stock Market

Conclusion

History shows a pre-election bullish trend in stock markets, driven by governments aiming to secure votes through positive market sentiments. Investors should note that large-cap stocks may outperform in the short term, but election-related volatility requires caution. Factors like FII and DII data, global interest rate cuts, India’s economic strength, and past market performance play a role.

Post-election, the government’s strength, overall market conditions, and alternative investments matter. Diversification into real estate alongside stocks could be prudent.

In this 2024 election season, staying informed and adaptable is key for sound investment decisions.

TL; DR:

Historical Trend: Stock markets in India tend to perform well one year before elections, with an average up move of around 30%. This trend has held for the past 25 years.

Government Incentives: Governments have strong incentives to keep the stock market positive before elections because positive market sentiments can lead to more votes for the ruling party.

Government Actions: To boost market sentiments, governments often reduce interest rates, which increases liquidity and money flow into the stock market.

Current Market Dynamics: As of September 14, 2023, the Nifty 50 (large-cap companies) has seen a 19% increase in the last six months, while mid-cap and small-cap indices have seen even greater gains. The market is poised for further growth.

Expected Growth: Technical patterns suggest a potential target of 21,500 – 22,000 for the Nifty 50 before elections, but this comes with increased market volatility during election years.

Other Factors Driving Market Rally: Factors such as strong foreign and domestic institutional investor interest, global interest rate cuts, India’s economic strength, and a short-term market underperformance can contribute to a pre-election stock market rally.

Post-Election Considerations: After the elections, market performance depends on the type of government formed, overall market conditions, and alternative investment options like real estate.

Government Type: Markets respond well to decisive governments, and a strong majority government can have a positive impact on post-election markets.

Market Conditions: If the market reaches the 21,500 target, it may not be considered undervalued, potentially leading to higher interest rates or taxes due to government debt levels.

Alternative Investments: Real estate may become a more attractive investment option post-election, and diversifying between stocks and real estate could be beneficial.

Sources:

[1] 1https://economictimes.indiatimes.com/wealth/invest/stock-market-in-election-year-what-historical-returns-from-equity-suggests-how-to-navigate-it/articleshow/101918852.cms?from=mdr

[2] https://tradingeconomics.com/india/interest-rate

[3] https://www.tradingview.com/chart/

[4] https://www.google.com/search?q=india+vix&oq=india+vix&aqs=chrome..69i57j69i59l3.903j0j7&sourceid=chrome&ie=UTF-8

[5] https://www.moneycontrol.com/stocks/marketstats/fii_dii_activity/index.php

[6] https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=IN

Ever wondered what we get in return for the taxes we pay in India. Whether the Tax Structure is TOXIC? Check out our Blog post on HEAVY TAXES, But we get NOTHING in return

June 18, 2024 | By Shubham