How a gritty Indian market has been rallying ahead of Lok Sabha elections

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The benchmark Sensex and Nifty indices touched six months’ highs on Monday, with overseas investors pumping in close to $4 billion ahead of the general elections. Market participants whom Business Standard spoke to expect the rally to continue, as political uncertainty fades away with a recent opinion poll suggesting that the NDA government has an upper hand in government formation at the moment.

But this isn’t the first time markets have rallied in the run-up to general elections. In fact, a Business Standard analysis of stock market data shows that in three of the last four general elections, the markets have rallied sharply in the months leading up to the announcement of poll results. Only the elections of 2004 turned out to be an outlier.  

Take for instance the general elections of 2014. Three months prior to the results being announced, the BSE Sensex stood at 20,366. But by the time the results were out, it had risen by 18.4 per cent to 24,121. 

Similarly, prior to the 2009 election results, markets had rallied by a staggering 31 per cent to 12,173 on May 16, 2009 from 9,305 on February 16 that year. The elections held at the turn of the century also saw a similar trend, with markets rallying 14.8 per cent in the months before the results were announced. 

Since February 23, 2019, three months before the elections results are to be announced, markets have risen 4.6 per cent till date. 

“The probability of the current government returning to power has increased over the past month. There is now more certainty on the political front. This will drive sentiment. FII flows are now looking strong,” says Gautam Duggad, head of research, institutional equities at Motilal Oswal.

Other experts Business Standard spoke to concurred. 

Nifty has been at elevated levels over the past few months. But the movement was largely concentrated in the top 10-15 stocks. Now, over the past week or so, we are seeing the others catching up. The rally is now becoming more broad-based. We are now seeing a brisk rally in the small- and mid-cap space as well,” says, Rusmik Oza, head of fundamental research, Kotak Securities.

“Many investors who were sitting on the sidelines are now stepping in. We are now seeing broader participation,” he adds. 

A recent report by KR Choksey also points to similar trends. 

The report, which analyses 23 years of data, identifies three time periods -– pre-election months of October to January, the build-up and voting period from January to May and the post-election months from May to July.

The numbers presented in the report suggest that irrespective of the political situation, markets tend to rally in the ‘build-up and voting period'.

The report finds that in the October-January period, returns have been negative, averaging around -2.51 per cent. Most sectors show negative to low returns, barring Information Technology.

However, in the subsequent period from January to May, the markets tend to rally. Volumes are high with greater FII and DII participation. Average returns during this period work out to around 19.83 per cent, with sectors like IT, auto, capital goods delivering higher returns.

“A fall in October-January periods across the years under study has been followed by a steep rise in returns in the following Jan-May and May to July periods of the year regardless of election outcome,” notes the report. 

However, the general election of 2004 stands as an outlier. Markets actually fell in the lead up to the elections.

Election year trend during the past 23 years(1996-2019)
Period Months Returns Volatility Volumes FII/DII
Post-election#
May-July Positive/Above first Cools off Calms down Average
Election@ Jan-May Positive High High High
Pre-election* Oct-Jan Low/average Above average Building up Slightly high
# Uptrend in the markets on reduced volatility; @ Increased volumes and volatility; * Moderate activity in either direction. Source:KR Choksey report



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