General Elections To Put Brakes On The Stock Market Rally: Trivesh, COO TRADEJINI

Investors and market analysts are gearing up for election season; eager to either enjoy or anticipate the potential impact on the market.

The Indian stock market has always been volatile in the pre-election season. In the past 40 years, there have been 11 elections conducted and each of them had a pre-election rally in motion. Nevertheless, this year's traditional rally was not evident. The Nifty 50 has only moved by 7.68% (as of April 6th, 2024) since the pre-election season began, which is less than the average return given by the Sensex of the previous six months to the election outcome during all of these elections, which has been 14.3 per cent.

The results of the Indian election will be announced in June 2024. A few months from now, India will have a new government. Considering the approaching elections and the importance of monitoring the stock market, the Indian stock market is anticipating the upcoming election with bated breath.

Globally, the USA, the European Union, Russia, Mexico, and South Africa are among the staggering sixty-four countries that will be holding national elections in 2024. These countries represent a combined population of about 49% of the people in the world, the results of which, for many, will prove consequential for years to come, especially in the stock market domain.

Impact of elections

Elections can create uncertainty, which may cause investors to adopt a wait-and-see attitude, resulting in a drop in market activity. On the other hand, the election can even steer in a new administration with policies that boost the economy and the stock market. Therefore, the election's potential impact on the stock market remains uncertain, with two schools of thought.

Elections have the power to change the entire political environment of a whole country. Generally, if the election outcome is in favour of the existing government, the stock market rises as it indicates political stability and vice versa. Close races or unexpected results may lead to heightened uncertainty, causing fluctuations in stock prices.

Pre-elections

Pre-elections and post-elections are periods of significant interest and attention in the financial markets, as investors and analysts try to gauge the potential impact of elections on the economy and financial markets.

Investors tend to become cautious and risk-averse, leading to a decrease in stock prices and an increase in bond yields. This is because elections can bring about changes in government policies, which can significantly impact the economy and financial markets.
Interesting trends can be seen in how benchmark indices such as the Sensex and Nifty 50 performed in the five election years after 1999.

Historical Performance: Elections & Markets

Market and upcoming elections

The election's effect on the stock market will ultimately depend on several variables, including investor attitude, exit poll results, and the policies of the newly elected administration. The Indian stock market may experience increased volatility and range-bound trading in the lead-up to the 2024 general elections. This is due to several factors, including:

Uncertainty about election outcomes: The outcome of the elections can significantly impact economic policies and business regulations. The upcoming elections are a potential trigger for volatility. Investors often wait for election results to solidify before making significant moves, leading to range-bound trading.

VIX index: A potential surge in the VIX index (a volatility gauge) during the latter half of 2024, coinciding with the elections. This suggests increased price fluctuations, making clear directional movement less likely.

Government spending: Governments often increase spending during elections to boost the economy and improve their re-election chances. This can lead to higher fiscal deficits and inflation, which can negatively impact the stock market.

Potential opportunities within specific sectors

According to forecasts, long-term investors may consider stocks in the PSU, auto, and banking sectors following the recent sell-off. Furthermore, the Indian stock market has already factored in the expected victory of the BJP-led NDA in the upcoming elections, based on the results of pre-poll surveys. Nonetheless, if the party regains power for the third time, the infrastructure, defence, power, and renewable energy sectors stand to gain from a stable government. However, if the opposition wins power, stocks that stand to gain from their agenda might eventually rise in value. We may see a focus on agriculture, education, and health.

'Stay invested for the long haul, make thoughtful allocation decisions, and keep your eye on the bigger picture'

What investors need to know?

The number of new demat accounts opened since the start of 2024 indicates that the new year has drawn an unprecedented number of investors. According to data from the Central Depository Service and National Securities Depository, January saw 46.84 lakh new demat accounts, while in February, over 40.94 lakh new demat accounts were opened across the various platforms, highlighting the influx of new participants.

A new demat account means new investors in the market and with this growth, careful consideration of investments and their economic impact is crucial.

While waiting for the election results, avoid reacting emotionally. Don't sell off investments in a panic or make speculative buys. Bottom fishing opportunities are good for investors, but during an unpredictable market, it is better to stay focused on your long-term financial goals.

Investors are also advised to note the US presidential election happening on November 5, 2024. Elections in major economies can have ripple effects across global financial markets. International investors may adjust their portfolios based on expectations about how election outcomes will impact trade policies, international relations, and global economic stability.

Market to be range-bound

As of today, April 6, 2024, there has been no pre-election rally that has come to light. Uncertainty around outcomes and policies will likely lead to investor caution, keeping the market range-bound.

However, we can still expect an uptrend, and if one does occur, it will primarily affect large-cap stocks, particularly the benchmark indices, the Nifty50 and Sensex.

The weeks surrounding the elections will pass quickly, and markets will stabilize again. With prudent diversification and risk management, you will be well-positioned to seize opportunities when results are announced.