Here Is How You Can Let Your Money Grow in the Election Season

What is the market’s worst nightmare about the outcome of the Lok Sabha elections? A khichdi (hodgepodge) coalition, led by one of the smaller parties, getting a mandate to run the country in an action replay of what we had witnessed in 1996 post the defeat of the Congress?

Even seasoned commentators have talked about downside risks to governance (of which we have no evidence), impacting return on investment in the eventuality of an unstable coalition coming to power post the General elections in May 2019.

And what do market pundits want the most now? The re-election of Narendra Modi with a thumping majority for another five-year term ensuring continuity of policies? Most market watchers never hide their wish regarding the positive impact it will have on Indian equities.

Should you, the investors in stocks, therefore fret if the former scenario turns out to be a reality or turn euphoric if the Bharatiya Janata Party (BJP) gets a clear mandate yet again? Historical data suggests that you should neither be despondent nor ecstatic if either of the two happens.

A recent report by Sanctum Wealth Management finds out, “Across 7 elections in the last 27 years, whenever an investor entered the markets 6 months before the General elections and held on for 2 years, the investor made on average annualised returns of 23%, with most money made in the 2009 elections when the UPA Government held fort. While the least return has been a positive 1.5% in 1999 (when the incumbent party i.e. BJP won), this strongly implies that the 27-year track record has never yielded principal erosion when entering pre-elections.” An annualised return of 23 percent seems a mouth-watering prospect, if you follow the national election calendar and invest judiciously.

Unstable Coalition Gave Better Return

The report says that the so-called Khichdi United Front government in 1996 gave an annualised return of 13 percent to investors in two years, starting six months prior to the Lok Sabha elections. However, the re-election of a perceived to be a stable government led by the BJP in 1999, on the other hand, could fetch a mere 1.5 percent annualised return for investors in a span of 24 months. To be fair to the incoming regime in 1999, let us recall here that that was a period of global stock market turmoil, following the so-called dotcom bubble.

What the data, however, shows that after initial knee-jerk reaction perhaps, market moves on, driven more by economic fundamentals rather than by the cohesion or lack of it of the ruling coalition. And with the benefit of hindsight, we can say we have seen quite a few knee-jerk reactions before. A 20 percent down circuit greeted the news of a relatively weak Congress getting to form a government in 2004, in alliance with the Left and some other regional groups. And a 20 percent upper circuit was market’s way of celebrating a second-term for Manmohan Singh-led United Progressive Alliance (UPA) in 2009.

While the UPA I turned out to be one of the best years for equity investors, despite the 20 percent down circuit to start with, the euphoria accompanying the UPA II proved to be quite misplaced few years down the line.

Recent Elections Have Been Quite Good for Equity Investors

While the Sanctum research addresses the concerns of long-term investors, an Economic Times report suggests that Lok Sabha elections afford us good opportunity to make money in the short-term too. It says, “Data of the past 20 years (or four General elections) show that Nifty made the majority of its gains around the national balloting exercise. The gauge has gained 9,426 points from the lows of 1998 (from 809 to 10,235).”

“About 60 per cent of these gains for the Nifty have accrued in the period of six months ahead of the elections to six months after the elections.” If we follow this report, the best time to buy stocks is now and hold it for at least the whole of this calendar year.

However, even as you get ready to invest in stock markets, please go through the latest Reserve Bank of India’s Financial Sector report released only a few days ago. It says, among other things:

• The global growth outlook for 2018 and 2019 remains steady although the underlying downside risks have risen.
• Spill-over risk to emerging economies engendered by tightening of financial conditions in Advanced Economies, protectionist trade policies and global geopolitical tension has significantly increased.
• The gradual monetary policy normalisation in advanced economies (AEs) as also the uncertainty in global trade regime may adversely affect capital flows to emerging markets (EMs) and exert upward pressure on EM interest rates and corporate spreads.

Continuous FPI Outflow Is a Risk

What the report clearly indicates is that the flow of foreign portfolio investment, also known as hot money and one of the key drivers of domestic share market all these years, is going to be quite muted in the current calendar year too. Incidentally, after years of record inflow, we witnessed a massive reversal of the trend in 2018. Hence, flat return for equity investors in the year gone by.

Will the scheduled Lok Sabha elections bring much needed smile on the face of equity investors? Historical data has a categorical ‘Yes’ for an answer.

Disclaimer – After years of staying away from the market, I recently purchased 1,700 shares of an ailing PSU bank. Historical data has been an inspiration for me. But you should be mindful of the risks involved and take investment decisions accordingly.