Elections and The Market

Every time when the elections are nearby, most of the people get worried about who will come to power, what will happen to the market and economies and my investment? This is a very common worry, as everyone wants certainty and clarity whereas elections are most of the time un-predictable.

Market do have impact by the Election results which can been seen by the previous occasions. In 2004 when the BJP-led NDA coalition lost the elections in a shock result, the BSE-30 Index collapsed from 5,358 on May 12, 2004 to 4,961 on May 21, 2004, a loss of -7.4 % in 7 days. When the UPA-2 was re-elected by a wider-than-expected majority in the May, 2009 elections the stock markets surged by +17.2% in one day on May 18, 2009. Trading was halted three times that day as the market hit 3 upper-limit circuit breakers during that truncated trading day. There was less than 90 seconds of actual trading on that day!

But do the Elections results have deeper, long term impact?  History shows that discussion on election results is a great conversation starter but it does not have long lasting impact on our investments! As the heat and dust on election campaign settles down and a new government comes into a picture and slowly starts working for long term policies, the market also settles down.

If we analyse economic growth since 1980, i.e. last 39 years the average real GDP growth was above 6%. In single party rules (all of Congress), for 1980-84 it was 5.9%, 1984-89 it was 5.4% and for 1991-96 it was 5.2%. On the other hand in co-coalition government of 1996-98 (Devegowda & I K Gujaral) & 1998-99 (Bajpayee Govt) actually it was higher at 6.1% & 6.7% respectively. Further in UPA-I the growth was 8.5% while in UPA-II it went down to 6.6%. For current NDA govt. the growth is 7.4% (based on new data series.

What it shows is that the coalition government has actually given better growth compared to single party government. Although it is not necessary, but what it means is that GDP growth depends on various factors and even a coalition govt can also deliver better results.

To summarise:

·        Elections don’t really matter over a longer period, India’s economy will grow.

·        Having a coalition government  can be even better sometimes than having a single-party government!

·       The rate of growth depends on various factors.

·     India growth story may remain intact as India is the domestic consumption based economy with 1.3 billion people who are going to add to the economy.  

So what should we do in this scenario?

Scenario 1 – If we believe that a BJP-led coalition will come to power;

Then we should increase allocation to equities to 60-70% and remaining amount can be split in gold and liquid funds.

Scenario 2 – If we believe that a Congress-led coalition will come to power;

Then we may continue with equities to 50-60% and remaining amount can be split in gold 20-25% and liquid funds 10-20%.

Scenario 3 – If we believe that some third party-led coalition will come to power;

Keep the equity exposure below 50% and remaining amount can be split in gold 25% and liquid funds 10-20%.

Please note that above mentioned portfolio allocation is a general advice and should not be considered as investment advice/recommendation, reader should consult their own financial advisor before taking any decisions.