Stock market behaviour prior to a general election – a guest post

The next general elections for Lok Sabha seats are less than a year away. Political parties have already started pre-election activities like choosing likely candidates for the PM’s post and discussing possible alternative alignments for government formation.

The period prior to a general election is usually one of uncertainty for investors. Uncertainty leads to selling, or at best, staying on the sidelines – neither being particularly conducive for a bull phase. In this month’s guest post, Nishit presents a different viewpoint

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The next General Elections are round the corner. Let us see the implications for the stock market. Most believe that the uncertainty of elections leads to markets falling. A friend of mine had done an analysis where he compared the 1 year period leading to general elections, and found out that in 5 out of 6 occasions the markets had rallied at least 20% prior to elections.

In the year the market did not rally before the elections, it rallied after the elections (in 2009). Next is the timing of the elections. There are 3 likely slots for elections: In September 2013, November-December 2013 and the original slot of April 2014.

For elections to happen in September 2013, the elections should be announced now. It takes the Election Commission about 4 months to organize an election and also the monsoons have to withdraw. The Parliament is not in session till July and the Government would like to see how the Monsoon progresses before jumping the gun and calling for early elections.

That means September is more or less ruled out. That leaves us with the November-December slot along with the State elections, or the normal elections next April. I strongly feel it will be next April because out of the States going for elections in December, Madhya Pradesh and Chhattisgarh are BJP strongholds and in Rajasthan and Delhi, the Congress is on very weak wickets. If the elections are held simultaneously it can very well happen that the Congress loses out on Lok Sabha seats also in these States.

Also, the Congress as a rule never calls for elections before its term is up. If we go by that yardstick, then also the elections should be held next April.

If we take the Nifty bottom in April ‘13 (of 5477), then a gain of minimum of 20% till the elections in April ‘14 can take us to 6572.

The situation post the election results may completely change. The stock market will depend on the stability of the next Government and we will explore that as we come closer to elections.

If we go by the above hypothesis, then every dip becomes a buying opportunity. Profits need to be booked at higher levels so that one has investible funds in hand when the market falls. The previous elections in 2009 created a big gap at 3700-4000 in Nifty. After the next general elections, Nifty may very well go and fill that gap.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)