The impact of elections on the capital markets

May 9, 2019
Capital Market

 

Every investor is watching the capital and stock markets carefully ever since the 17th Lok Sabha elections were announced. How the markets will react to the election announcements and what will be the fallouts of the declaration are the top questions on all financial analysts minds.

The stock markets are very sensitive and fluctuate with changes in policy, governmental investments, and general economic stability indices. Elections would mean there would be a policy change that could be or may not be friendly for investors, may cause temporary economic instabilities, and are generally indicators of economic stability. The people’s verdict and the new government will thus definitely influence the stock markets pan India and globally too and depends heavily on the policies, reforms introduced by it and the stability of the government at the helm for the next 5-year plan.

Let us have a quick look at the factors and effects in the two stages of the election announcement.

The pre-election phase:

This phase is purely speculative and perceptive. The outgoing BJP government did bring in investor and consumer-friendly reforms like digitization of payments, GST and black-money removal among others. The demonetization and GST reforms did run into snags and hurdles. But the overall perception of the governmental policy was that it was investor and reforms friendly. Hence markets responded positively. In the run-up phase to elections, it appears the stock markets respond positively to news that the BJP will score another term.

Foreign-investor sentiments also play a big role in economic development and stock market fluctuations. The press-sentiment reflected globally influences investor sentiment. A stable and long-lasting government sans fractured mandates is always good for institutional foreign investors and investments from them. Stocks tend to decline when foreign investors perceive a threat to their investments and withdraw their investments. Fluctuations occur due to change in perceptions and speculations that run rife in the pre-election stage.

During the last election, the stock markets reacted violently plunging downwards when the favored BJP lost the key bastions of Madhya Pradesh, Chhattisgarh, and Rajasthan. Thankfully the effects were short-lived and the stock markets recovered when news emerged of defeat margins being low and the mandate clear.

The recent India Pakistan tensions and skirmishes also affected the stock markets when the NSE and Sensex nose-dived after the Pulwama attacks. The markets rallied when a BJP-win was predicted after its counterinsurgency strikes which boosted positively the public sentiments and perceptions of the BJP government.

Thus fluctuations should be considered the rule and not the exception in the pre-election phase.

Post-election results stage:

A clear mandate from the people always augurs well for the stock market prices to rise and stabilize. The results will decide if BJP will win the confidence of the voters and allow their implemented measures for economic reforms to yield fruit. It is predicted that the stock markets, foreign investments, Sensex and Nifty will surge upwards if BJP does win the elections with an unambiguous mandate for a second term as they did in 2014.

If the mandate is a wee bit short of a clear majority and the BJP does manage to form a stable government at the center, one can expect volatility in stock markets till stability is established with the new coalition government formation.

When the people’s mandate is ambiguous and fractured the stock markets will continue a fluctuation filled run up and until people see a stable government formed at the center. Then recovery will be slow and cautious and investors will follow the wait and watch policy. Especially the foreign investments pattern will take a hit.

Concluding notes:

In parting, it is a fact that stock markets fluctuate and rely on perceptions of a stable government at the center. How the results will pan out is mere guesswork. However, analysis and trends do predict a second consecutive win for the BJP and this is good for the stock market prices.

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