Will Indian Elections Shake or Shape Your Stocks?

Kotak Insights | Date 09/02/2024

India's elections are a big show, and with the upcoming General Election in 2024, the stage is set for a roller-coaster ride in the stock markets.

The big question on every investor's mind is: How will this event move the markets?

Let’s take a closer look at this and understand the potential impacts and how one can navigate the markets in such a scenario.

Elections and Sensex Returns

Checking the history books, one thing keeps popping up – there is a noticeable surge in the market momentum both preceding and following the election period.

In the short run, the market's response to elections is diverse. It is influenced by anticipated policy changes, economic reforms, and the prevailing sentiment regarding political stability or instability.

However, an analysis of the BSE Sensex’s 6-monthly and yearly returns before and after the last few Lok Sabha elections show that stock markets mostly have gone up whether you jumped in before the election buzz or waited until after the drama settled.

Here’s a tabular look at the Sensex’s performance…

Where the Sensex Stood Before & After Elections

If you notice the table above, the average returns in various timeframes have mostly been positive, with the exception being the year 2019, marked by the COVID-19 pandemic-induced market downfall.

Notice the market's run up since the pre-election period up until the election day and how they continued their momentum beyond.

What Should Market Participants Do?

Amid this market performance we just saw, investors and traders are often caught in a dilemma of whether to act swiftly or adopt a patient stance during elections.

However, do understand that the actual market movement can be different in every election year as there are many changing sectors at play. An effective way to approach markets could be to take a detailed approach at the sectors and analyse how the upcoming or anticipated policy changes could affect the economic landscape.

At the same time, it is also important to be conservative in your strategy and not get swayed by the increased market volatility.

As the smart investor Warren Buffett puts it, "The stock market is designed to transfer money from the active to the patient."

In simpler terms, it means being patient usually pays off in the long run. And that can be one of the approaches to navigate the election related market volatility.

So, while waiting for the election results might feel like a time of not making up your mind, it's super important to know that the market has its own rhythm. Making quick decisions might sound exciting, but it could lead to unexpected outcomes.

That’s when mind over money comes into the picture.

Economic Policies and Market Dynamics

Attempting to predict market movements solely based on election outcomes is akin to forecasting in turbulent weather.

George Soros' perspective, "The financial markets generally are unpredictable," rings true.

Remember, in a big economy like India, there's a whole story unfolding – both in the little details and the big picture, at the micro level as well as the macro level.

One thing you can keep an eye on during elections is the economic policies. As you analyze them, remember that some policies might make certain parts of the market happy, like when there's talk about building things or making economic changes.

On the flip side, any unpredictable changes in policies about taxes, rules, or trade agreements could also make the market a bit jumpy.

While specific sectors may react positively to a particular party's victory, the broader market's movements are influenced by a myriad of global and domestic factors.

So, one should exercise caution when making predictions and have a diversified and resilient investment strategy in place during such times.

Conclusion

As you go about approaching the markets ahead of the general elections, the emphasis should be on informed decision-making, adaptability, and a focus on long-term fundamentals.

Here's a wise thought from Benjamin Graham to keep in mind: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

It's like a little reminder that the quick ups and downs in the market are a bit like voting – things can change in a short time. But what really matters, the big value, comes from looking at the underlying market fundamentals that shape how investments and markets succeed.

For more market insights, tune into our research team's recent webinar below, where they talk about the Interim Budget, market strategy, and top stocks.

2024 Interim Budget Insights | Budget Webinar

We’ll be back with another exciting story next week!

Until next time,

Happy learning!

Sources: Kotak Securities, BSE, Moneycontrol, Economic Times

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.