How Elections Affect the Stock Market

How Elections Affect the Stock Market

People often ask me questions like what will be the financial impact of election on stock market or best stocks for election, when is the stock market expected to rise and many more but I have kept on suggesting and informing my followers that during election tenure it is highly risky to invest in stock market. you might be thinking what will the election do to the stock market the unpredictable high and low in the market can cause major loss to new traders.

The month of May has traditionally been a volatile period for Indian equities, particularly in election and investment. in the last ten years (since 2008), the benchmark indices, the S&P BSE Sensex and the Nifty50, have gained seven out of ten times, with the outcome of the election acting as a key driver to the market movement.

Similarly, in May 2014, the benchmark indices had risen eight per cent, following Narendra Modi-led Bharatiya Janata Party ‘s (BJP’s) landslide ending.

This time around, however, analysts say the markets are already factoring in a victory for Narendra Modi – led National Democratic Alliance (NDA), albeit with a reduced majority. That said, a negative surprise may see a knee-jerk reaction.

Global developments and corporate results back home are the two key factors that will keep the markets choppy until the election result is known. On May 6, the volatility index, India VIX, for instance, rallied ten per cent intra-day midst poll uncertainty and fast global trade tensions.

“Markets have witnessed a meaningful pre-election rally in the month of March and early April. Since mid-April, we have witnessed a lack of aggression in the broader markets. Midcaps have witnessed meaningful correction while mixed activity is seen in the frontline space

With only one more rounds out voting of a total of seven left (May 19) before the election outcome is known on May 23, should you exit the markets or stay put?

Analysts say investors who have an appetite for risk and can digest volatility should keep invested with. while the election outcome can trigger a knee-jerk reaction in the short-run, the medium-to-long term flight will be decided by corporate earnings and other global / local developments. For those seeking a safer choice, hedging exposure or exiting the markets will be a prudent strategy.

“A wise approach would be to hedge the existing market position or trim exposure to high beta sectors like non-banking financial companies (NBFCs) and others. A BJP-led government will be seen as a stable government that is probably to focus on capacity creation through infrastructure development. Cement companies and corporate banks like ICICI Bank, Axis Bank are smart stocks to focus on.

Analysts also recommend infra-based sectors, as they will remain focused over the long-term, regardless of the election outcome.

“Our strong view would be to align to new growth focus areas for the new government such as housing, credit penetration, tourism, healthcare for all and watch out for the nascent recovery in the Investment cycle. A natural corollary to that will be to shop for banks, real estate, cement, healthcare and the hospitality sector

Some experts also remain optimistic on pharmaceutical company, banking and knowledge technology sectors.

PSU and capital goods, have done well historically during elections on hopes of better policy mechanism post government formation and can be considered for investment.

“The traditional performing sectors – banks and fast moving consumer goods (FMCG) – could also do well. However, given high valuations of the stocks in these 2 segments, one should be careful in increasing exposure to them now. Stocks and sectors to bet on ahead of general election outcome.



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