Market’s ‘Mann ki Baat’: How to Invest During Election Season

What would a sensible market investor do during election season?

Yet again, the share market is booming before an election.

(Photo: The Quint)

Video Editors: Mohd Ibrahim and Ashutosh Bhardwaj
Video Producer: Anubhav Mishra
Cameraperson: Abhishek Ranjan

Yet again, the share market is booming before an election. It is important to understand the reason behind this boom. Is it the likelihood of Modi’s return as the prime minister, or is it due to global factors?

Markets usually follow an upward trend before a major election. Sometimes, the boom increases after the election. But this time, this pre-election boost feels like post-election boom.

Reasons Behind the Market Boom

There can be two reasons for this upward trend. First, the possibility of the return of Modi government to power. The second factor is global. The slowdown in the American economy has resulted in global recession. Among the emerging economies, India is looking like the most attractive destination to foreign investors. But the Foreign Institutional Investors (FIIs) are investing in Exchange-Traded Funds (ETFs). They aren’t investing directly in shares.

Another crucial factor is the strengthening of rupee. RBI has also sent positive signals with regards to interest rates. Hence, FIIs are feeling that they can get good returns in India at this point.

This has led to a surge in foreign investment.

There is Always a ‘But...’

However, despite the boom in the market, there are a certain ‘buts’ that you need to keep in mind. The FIIs are investing in the ETFs, not in individual shares. Since the market is on rise, the domestic investors – who have cash in hand – are pondering over the possible investment opportunities. But smart investors are trying to sell some of their shares and get out of the market for now.

Two more key factors need to be kept in mind. In recent days, the price of crude oil has increased which in turn has increased the risk. The second factor is that the monsoon in India is projected to be lighter than normal.

Market Sentiment Post Balakot

The results of Chhattisgarh, Madhya Pradesh and Rajasthan Assembly elections created uncertainty in mind of investors. By December, the share market had gone down. There was some doubt in mind of investors on whether the Modi government will return to power.

But the Union Budget in February and the sequence of events from Pulwama to Balakot changed the market sentiment.

The market sentiment is that if a non-BJP coalition forms government then the growth might stop. However, the market also doesn’t say that the BJP will get a majority. Multiple reports claim that BJP will return to power, but with fewer seats and will form the government with coalition partners in NDA. Markets are based on sentiments and right now the sentiment is that there will be a policy continuity post election and hence we are witnessing this period of growth.

Returns Under New Government

In 8 out of 10 previous elections, markets have soared before the polls. After the polls, the markets continued to growth at 3-4 percent for next 6 months. However, if we see 18 months after the election, the returns have been in the range of 30-35 percent.

During these trends, both single party and coalition governments have been in power.

In the last five years, the markets did not achieve the boom which was expected from it. But the gains it made last few months are impressive. However, it’s not a broad growth. Mid-caps and small-caps are still under performing, although some of those shares have shown growth. About 10-15 shares in large cap are also growing. Market is expanding because of valuation and not liquidity.

Markets Will Gain Irrespective of Which Party is in Power

Since, a consensus has emerged in the market that Modi-led NDA will come back in power, a sentiment of growth exists for now. But if another coalition comes to power or even a weaker coalition comes to power, then even if market will drop for a certain period of time, as soon as there will be clarity in policies of new government, the market will begin to see green again.

There are no doubts in that Indian markets will experience growth in the long run. Indian economy will experience a rapid growth. Companies will make money from the market. This is a time to invest for long-term gains.

What Should an Investor Do in Present Scenario?

In my opinion, smart investors will keep themselves on fence for the length of the elections. They will keep the good stocks with them and along with it, some cash in hand. They will invest once the new government makes its policies clear. This will be my advice too.

Market may experience a boom or a slump. Which party is in power will also have no significant impact. In the coming days, if you wish to earn big money, then you cannot afford to ignore the Indian market.

But, if an investor enters the market at this point with the mindset of trading, then it will be similar to shooting themselves in the foot. No sensible investor is ready to make any big bets, right now.