The rise or fall in the markets will be dictated by expectations or lack thereof of a stable govt coming into power post elections apart from other global factors impacting their direction.
If we start from the 2004 general elections, Nifty50 made a bottom in April 2003 and rose non-stop till January 2004. Post that, the index went sideways for 4 months and later fell in May 2004 as the NDA Govt got voted out of power.
The markets made a bottom in May 2004 post elections and later rallied 40.7 percent from the low point registered in the same month till the end of May 2005.
Foreign institutional investor (FII) activity, which was subdued till March 2003, picked up in the following three years gradually before falling again in 2006-07.
Post the Lehman sell-off, Nifty consolidated between November 2008 and March 2009. It later began to rise for the next two months in anticipation of the election outcome.
Nifty rose 61 percent from February-end to May-end. Post the results, Nifty rose only 14.3 percent from May 2009-end to May-2010 end.
FIIs were largely net sellers worth Rs 47,700 crore in 2008-09 on the back of Lehman crisis. However, in the succeeding year, they were large buyers to the tune of Rs 1,10,221 crore.
This was on the back of QE – 1 announced by the US Fed in November 2008, which was expanded in March 2009 (Nifty made a bottom on March 6, 2009).
Nifty went sideways between November 2013 and February 2014. Nifty rose 15 percent from the end of February to end of May 2014. It rose 16.7 percent from May 2014-end to May 2015-end.
Markets were rising due to buying in large amounts by FIIs (2012-13 Rs 1,40,033 crore, 2013-14 – Rs 79,709 crore) due to falling commodity (including crude) prices, RBI cutting rates and generally easy liquidity across the world.
FPIs continued buying in 2014-15 (Rs 1,11,333 crore) partly due to NDA winning the Lok Sabha elections.
This bullish momentum came to a halt in March 2015 due to combination of factors like 12-year high USD rate, slowing Chinese economy and outcome of bank stress tests.
Now at the current Juncture- 2019 elections:
Between the end of November and end of February, Nifty closed flat on a monthly basis. In that respect, we are similar to the 2004 scenario (even then NDA was in power).
However, NDA lost the election in 2004 and Nifty fell sharply in May 2004 but rose thereafter. The difference is that in 2004, the sideways trend was during the election phase while in 2019, the sideways phase was before the election dates were announced.
In 2019, we are facing FII activity that is on the lower side (2017-18 +Rs 25,635 crore, 2018-19 –Rs 27,321 crore). Volatility will keep rising as election dates come closer.
The rise or fall in the markets will be dictated by expectations or lack thereof of a stable Govt coming into power post elections apart from other global factors impacting their direction.
In all elections, there is a severe reaction to the outcome of elections but later from the low levels, there is a decent recovery over the next year.
Investors have a choice as to whether they would wait till the election results are digested and then invest to be more sure of making money or they would prefer to invest ahead of the results (in which case they may have to face a fall during the election phase or after the elections). Traders who are nimble footed can do both – i.e. trade ahead of results and invest later.
If the Nifty rises well during the election phase, then the possibility of it rising post elections by a large margin will be low irrespective of the outcome, while if the Nifty remains sideways or corrects during the election phase and the outcome of election is favourable, then there are better chances of a smart up move therefrom.
The reaction of FIIs would be crucial as is evident from the way the frontline and mid/smallcap indices have behaved since February 22, 2019, when FIIs changed their stance on India in terms of flows from neutral to positive.
In all instances, Bank and Capital Goods indices have done well between the announcement date and result date. PSU and Realty indices are next.
(The author is Head Retail Research, HDFC Securities)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.