Why Lok Sabha election is a non-event for stock market investors
Recent events suggest a parallel anticipation in the market ahead of the upcoming general election. The market's mood was sceptical before the five assembly elections results were out.
As the electorate prepares to vote in the upcoming general to determine India's leadership for the next five years, watchers often look for cues on how the results might sway sentiments. History shows us that election outcomes can significantly influence market movements. For instance, in 2004, the market dipped when the lost power; in 2009, it surged when Congress retained power. Similarly, in 2014, anticipation of 's leadership led to a pre-election market rally.Recent events suggest a parallel anticipation in the market ahead of the upcoming general election. The market's mood was sceptical before the five assembly elections results were out. There was a fear that Rahul Gandhi's yatra would galvanise more votes for the Congress. Forming the INDIA bloc would mean that the BJP will find it tough to increase its vote share and, in turn, number of seats. However, the BJP's strong showing in the state elections, retaining power in Madhya Pradesh and reclaiming it in Rajasthan and Chhattisgarh, eased market concerns. Since then, the Nifty has surged by nearly 10 per cent.
Further boosting market confidence was Modi's assertion in February 2024 that the BJP and its alliance would secure over 370 and 400 seats, respectively, in the forthcoming election.
On the other hand, Opposition parties seem to have accepted the defeat. Their body language could inspire more confidence. The INDIA Bloc also need to reflect that it's one unity opposition, as each regional party has decided to go on its own, like Mamata Banerjee in West Bengal and AAP in Punjab. In states like Maharashtra, even seat-sharing discussions are still on. There is a doubt that there will be an INDIA bloc post-election.
However, the market's reaction to a BJP victory might not mirror previous bullish trends. Experience from the 2019 elections, where the BJP and the NDA gained more seats than in 2014. The BJP's tally increased from 282 to 303, while the NDA's increased from 336 to 353. The BJP also expanded its reach from western and northern India to Eastern India. And yet, the market post-election result was down by 6 per cent in three months (look at the graph).
might heed the adage of "buy on the rumour, sell on the news," anticipating that the election outcome, already factored into current market prices, may not trigger a significant upward movement.
Another reason for the limited upside is valuations. India's TTM P/E ratio (excluding Banks and NBFCs) is 30x. This is not a cheap valuation by any imagination. Even the famous market cap to GDP ratio based on FY2024 GDP is 127 per cent, and one year forward, it is 116 per cent. China commanded the highest market cap to GDP ratio in 2007, at 121 per cent.
With India's economic trajectory hinging on factors like inflation trends, corporate earnings, monsoon patterns, and government policies, post-election market dynamics will likely be shaped by broader economic fundamentals rather than electoral outcomes alone.
In conclusion, while the general election undoubtedly holds significance for India's political landscape, investors may find limited bullish prospects in the aftermath, with market movements more closely tethered to fundamental economic indicators than electoral events.
(Sunil Damania is Chief Investment Officer, MojoPMS. Views are own)
Source: Stocks-Markets-Economic Times
