With 2024 being a year of general election in India, equities are expected to see a lot of volatility. So most equity investors remain anxious about its impact on their investment. They will try their best to make sure they do not end up losing their investment momentum in such a year.

As with any major industry-influencing event, there are always volatilities around the general election, specifically 2-3 months prior to the event. This is very common and should always be expected,” says Sanjeev Govila, a SEBI Registered Investment Advisor (RIA), and CEO of Hum Fauji Initiatives, a
financial planning firm. The year 2024 is special as there will be presidential elections in the US as
well. “The Indian general election in May and the US Presidential election in November could make the markets jittery in the run-up to those events, but a cooling off in oil prices combined with the strong earnings potential of Indian companies paints a positive outlook for the market in 2024,” says Jaspreet
Singh Arora, CIO, Research & Ranking.

Many investors would be taking a cue from recently held state elections. “The assembly elections have been decisive, and the market views it to be signalling a third term for the incumbent Modi government,” says Arora.

However, elections and stock market are known to throw up surprises, and investors would like to understand if they can expect any sharp movement this year? We tell you what the trends and the market dynamics suggest and how you should deal with your long-term stock investment in this election year.

Results of Past General Elections in India since 1980

Source: Samco Securities

How Equity market performed in the 6 months leading to elections?


Source: Samco Securities

What the trends suggest about equity market movement in election year Government policies can significantly impact the profitability and viability of many business segments. So investors remain anxious about the implications of election results. However, going by the trends, things cool down in the medium term, especially after election results are announced.

“Historically, markets have displayed heightened volatility in the run-up to the elections due to uncertainty. However, post-election periods have often witnessed a return to stability as clarity emerges regarding the politicallandscape,” says Nikunj Saraf, Vice President, of Choice Wealth.

Most of the volatility in stocks is seen before the election. “The pattern is very specific and repeats election after election. Typically, general election-related volatility starts about 3 months before the election dates and increases with the media churning out statistics and speculations about the winners and losers in the constituencies,” says Govila.

“It reaches its heights when the polling schedule is announced by the Election Commission of India approximately a month before the first phase of polling.” Political uncertainty plays on investors’ minds, fuelled by all sorts of speculations about the political outcomes and its effect on markets and industry. “However, this uncertainty has nothing to do with how the industry or economy is or will perform in future. In fact, it is merely herd behaviour and a repetition of the fear-and-greed cycle,” adds Govila. An analysis of all the general elections since 1980 suggests that incidences of negative returns is only one in six months leading to the election results day. “1998 was the only year when the Sensex recorded negative returns of 9.3%, while 2009 witnessed the highest returns of 59.8% in the 6 months prior to the elections,” says Sheth.

Equity market faces short-term volatility when the results day approaches. However, the six-month period leading to the results day has mostly given positive returns and markets have stabilised after that in the long run. “The Sensex has shown remarkable resilience amid political chaos that have
happened ahead of the past 11 general elections, held between 1980 to 2019. In the six months before each elections, the BSE benchmark has generated an average of 14.3% return over 39 years, highlighting the stock market's ability to navigate and thrive in the middle of political speculation and changes,” says Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities.


Source: BCCL

Lesson that past markettrends can teach Sheth says past patterns indicate that markets tend to rally each time before the general election results are announced. Pre-election market rallies happen due to certain factors.

These are:
1. Political parties generally promise structural reforms if they are elected to power. This lifts market sentiments
2. Political parties boost consumption by spending on voters, injecting liquidity, and aiming to secure support, indirectly influencing the markets
3. Budgets declared in the election year and the preceding year prioritise pleasing the general public, and strategically aligning policies to garner support
4. If there's confidence that the election will result in a stable government, companies, FPIs and other investors are more likely to show positive sentiment

All of the above factors have led to the market generally doing well in the election season of the past four decades. Investors must keep an eye on the latest developments and look for sectors and companies which can benefit from the general elections and invest in them. Being ready with the right portfolio mix is the right move instead of worrying about equity market movement around the election.

“One key lesson is that short-term volatility is common in the lead-up to elections. Investors should focus on the long-term fundamentals of the companies they invest in, rather than making impulsive decisions based on short-term market movements. Diversification remains a prudent strategy to mitigate risk, as certain sectors may be more sensitive to political changes than others,” says Saraf.

Whether it is the same government or a new government that will be sworn inafter the elections, what matters is the economic growth in the long run. “Data over the past two decades shows that the markets finally respond to the progress of the economy in the short and long term and its outlook, rather than to the election or non-election of a particular party, head of the country or the internal wranglings that took place during the election time,” says Govila.

Should investors be ready to adjust their portfolio before and after election results?

As government formation has serious implications on economic growth, investors should remain cautious and be ready to act if the new development demands so. “Investors must remain agile enough to adjust their portfolios before and after the election results are announced. Some corporates are generally seen closer to the political dispensation at the helm. If that political party isn’t voted back to power, then it can have a negative impact on the stock prices of these corporates. Even though the business of these corporates may not be materially impacted, the perception for the corporates may change, which can have an impact on the valuation multiple,” says Sheth.

However, if you have a well-diversified portfolio, you may not need to have a knee-jerk reaction. “I understand it's tempting to make sudden portfolio adjustments in response to election results. Prudent investors typically base their decisions on the overall economic and business environment rather thanshort-term political outcomes,” says Saraf.

Even if the incumbent government returns to power, there is no guarantee that the economic policies will remain the same under the new government. “Even a re-elected government could have changed priorities based on the signals given by the electorate during the campaigning process,” suggests Govila. “That could lead to realignment of some policies and hence, there’s nothing much that will materially affect the state and progress of the economy and the companies.”

What should equity MF SIP investors do in an election year?

If you have invested in equity mutual funds through SIPs, should you be worried about election-related volatility? "If there is a need to make changes, good fund managers will anyway do that in their funds," says Govila.

"If you’re convinced that you have invested in good funds with sensible and proactive fund managers, there really is no need for any retail investors to do changes in their SIPs just because elections are around or have just taken place.”

Saraf says the only thing an SIP investor can do is to continue with the investment. However, if you wish to add an element of safety to your equity portfolio, consider increasing your largecap fund exposure and reducing your exposure to midcap and smallcap funds. “Smallcap and midcap stocks have witnessed a sharp rally. Some of them even look stretched on the valuation front. On the other hand, largecaps have underperformed drastically and are also available at good valuations. We believe one can switch their smallcap and midcap fund SIPs to largecaps. These stocks will also provide safety in the event of volatilityin the markets,” says Sheth.

Precautions equity investors should take Unless there is an alarming development that is likely to hit a specific stock or a sector where you have significant investment, you may not need any election-related strategy to deal with your equity portfolio.

“There are onlythree things that investors need to do during election times – ensure they are invested in a good portfolio whether it be of stocks or equity MFs; ensure that they keep a check on their own behaviour and emotions when all sorts of analysis and reports fly around; keep away from noise as far as possible and keep faith in their portfolio,” adds Govila. In case you want to play safe, reduce your investment in risky stocks. Sheth suggests investors limit allocation to risky small and microcaps, increaseallocation to gold and add long-tenure debt to benefit from peak interest rates.


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