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HARSH DESAI

FE-08318

INVESTMENT BANKING

05 JANUARY 2024

“Evaluate the Impact of ongoing elections on the investment climate in India”

Introduction to Indian Elections and Impact on Investment

Elections are a significant event that play a impact on the stock markets as they are

recurring and fixed on fixed schedule. The elections events are crucial for a country’s

political sentiment and economic stability, and retail investors closely monitor the outcomes

to understand the market dynamics. Some even attempt to time the market during such

periods. However, the relationship between elections and the stock market is complex and

influenced by various factors making to essential to understand the nuances of the situation

before investing.

Macroeconomic factors are also playing a leading role in the elections period which

directly affect the stock market. Consequently, it is not always beneficial to base financial

decisions exclusively on election results. During the elections results, retail investors should

focus more on the stocks which are going to be benefitted in the longer period rather than

focussing on short term movements in the market. Retail investors should diversify their

portfolio rather than concentrating on one single asset class. Investors may guarantee the

safety of their portfolio and accomplishment of their financial objectives by doing this.
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Impact of Election on the Stock Market

Election related events like debates, rallies and opinion polls may also create short

term volatility in the stock market as investors react to the changing political dynamics.

Hence, to make more informed decisions investors need to stay informed and investing

strategies as needed across election cycles. Changes in political parties, administrations and

ideological differences can affect government policies, economic goals and legislation which

can affect a wide variety of enterprises and sectors.

The policies and changes may significantly affect the Indian Stock Market and the

overall business environment. To ensure the long term success and stability, investors must

thoroughly consider and assess the possible effects of these changes on the investors portfolio

to make wise decisions. India’s political landscape has undergone 11 government changes

between 1980 and 2023, with the current BJP holding a clear majority since 2014. The

economy has grown steadily with a average real GDP of 6.2%. The Sensex has seen CAGR

of 9.5% in dollar terms and 15.5% in rupee terms up to August 2023. With the upcoming

elections of 2024 speculations suggest that the coalition government could be formed which

could result in significant reforms and consensus driven decisions limiting its potential

growth as compared to countries like China.

Corporate productivity and AI impact will continue to influence the equity markets

with a double digit nominal returns expected for the next two decades.
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Source-LiveMint

The above graph shows that there is a steady growth for four decades which

shows that Long term market performance seems to be resilient to government changes. Even

when there were market corrections in 2004 consistent economic reforms and corporate

earnings have allowed the market to bounce back and maintain an overall growth trajectory.

This shows that the market remains strong with its growth even after the election results.

Morgan Stanley reports predict that with the current government win by clear

majority could lead to market gain of 0% to 5% in the subsequent 3 months. Jefferies predict

that a 10% probability of a BJP defeat in 2024 and expects the market to correct by 10%.

However, with a win without a clear majority resulting in a coalition government might cause

the market to fall between 5% and 25%. The most negative scenario could result in the

market crashing by up to 40%.

Source-SmallCase

In the periods leading to general elections, stock markets typically exhibit increased

volatility due to the uncertain election results and potential policy shifts. Analysing the past

market performance based on the table above, the average return one year before the election

is 29.1% and in one month before the election the average return is 6%. These statistics

shows a strong market performance pre-election. Therefore, despite the uncertainties and a

tendency of a wait and see approach among investors, historical data suggest the market has

generally performed well during these times.

Broad Market insights for Indian Stock Market pre vs post elections with the help of a

graph-
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Conclusion

When it comes to the impact of elections, national elections tend to have a greater

influence on the overall political landscape than state elections. National elections have a

wider scope and can dramatically shape the direction of the entire country. Investment

decisions are not only influenced by the domestic market conditions but also by international

factors such as trade wars or economic recession in various global markets. Hence, keeping a

close eye on the global market sentiment is crucial for making more informed investment

decisions. It is expected that the short term outlook will be characterised by increased

uncertainty and market fluctuations.

However, the long term outlook will hinge on the election results and the policies

adopted by the incoming government. The investment climate in India is subject to a complex

interplay of domestic and international factors and the outcome of the elections will play a

crucial role in shaping the future of the Indian economy.

Works Cited

 https://www.smallcase.com/blog/impact-of-elections-on-indian-stock-markets/

 https://www.linkedin.com/pulse/evaluating-impact-ongoing-elections-investment-

climate-aryan-gupta-zce5f/?trk=article-ssr-frontend-pulse_more-articles_related-

content-card

 https://www.wrightresearch.in/blog/impact-of-elections-on-indian-stock-markets/

 https://www.icicidirect.com/research/equity/finace/stock-market-and-2024-elections