The election of the world’s largest democracy has a significant impact on the stock market. The Indian stock market could rally by around 10 percent before the election, according to a recent report by Morgan Stanley. The elections are expected to commence in April, with results anticipated in May.
The report stated that if the pre-election market projections are accurate, the market could exhibit a considerable range of fluctuations, potentially swinging between a positive 5 percent and a negative 40 percent in response to the election outcome. This wide range underscores the significance of the elections for the market in the short term. It’s worth noting that historical data supports the occurrence of market swings during election periods, and there is a belief that this time, these swings could be even more pronounced.
It has been a historical phenomenon. For example, in 2004, when the election results were against what the market was pricing in, the Sensex fell 17 percent in a single trading session.
The report also highlighted the positive effect of incumbency if voters perceive themselves as prosperous. However, the challenge lies in the fact that prosperity varies among different voting cohorts. In addition to considering the absolute levels of growth and inflation, voters assess their prosperity based on indicators such as poverty rates, farmer suicides, terms of trade for rural India, female foeticide, infant mortality, and government transfers. There is an opportunity to introduce new policies before elections, which can influence voters in a specific direction.
What to Do with Portfolios
To handle the volatility around the election result, investors must take a view of the likely outcome and the ensuing market reaction and tailor the portfolio to match the view, as per the report.
It is also suggested that investors tailor their portfolios in a way suitable for their view of the four scenarios playing out. For example, if one believes the BJP will win decisively, they should be overweight in consumer discretionary, financials, industrials, and infotech. In the worst-case scenario, they should be overweight in consumer staples, energy, healthcare, infotech, and materials, among others.