Markets upbeat just six months before the 2019 Lok Sabha elections

Since 1996, bourses have registered strong six-month gains on five out of six occasions

Just six months before the general elections, investors usually tread cautiously. But if they look back at history, they have a reason to cheer.  

Since 1996, the markets have logged strong gains six months before on five out of six Lok Sabha election results. 

The benchmark Sensex has gained an average 17 per cent during the six-month period leading up to the counting of votes. The only time the markets fared badly was in 1998, when benchmark indices had declined eight per cent on account of the Asian financial crisis.

Last time (in 2014), the Sensex had rallied 17 per cent on optimism that the Narendra Modi-led Bharatiya Janata Party (BJP) would come to power at the Centre. In 2009, the performance was even stronger with the Sensex surging 30 per cent on hopes that the Manmohan Singh-led United Progressive Alliance (UPA) would be re-elected. Of course, the sharp recovery after the 2009 global financial crisis also contributed to the gains.

Will history repeat itself in the run up to the elections? Market players seem to be divided over the market trajectory.

“After the recent turmoil in financial markets, it is easy to be pessimistic. The macro outlook for India has certainly deteriorated somewhat compared to six months back; however, the outlook remains strong and gives us reason for optimism,” said Karvy Stock Broking in a note. Edelweiss expects the market to hover around the current levels till the elections.

“In our view, the Nifty will hover around 9,800–10,500 till the elections and, hence, we would run a relatively defensive portfolio while keeping an eye on opportunities that swings may throw up,” said the brokerage in a note.

On Thursday, the Nifty and the Sensex ended at 10,527 and 34,981, respectively. To be sure, both the brokerages are positive on the market prospects for end-2019. Karvy is forecasting Nifty to climb to 14,000 (45,000 for the Sensex) by December 2019 if the “BJP crosses the halfway-mark on its own.” Edelweiss, believes, the Nifty could touch 11,800 by the end of next year as India’s economic structure, business cycle and valuation premium would remain intact.

Illustration: Ajay Mohanty

Market players said investors will look for cues from the on-going state elections.

“Market participants believe that the state elections results would give them some perspective about the general election results,” said Ridham Desai, MD, Morgan Stanley India. “December 11 would be a key date in setting market expectations,” he added.

December 11 is when counting commences for the state elections that precede the one at the Centre.

“That’s when we know what the market has started believing about 2019 – whether it’s going to be a single party government or a coalition one,” Desai added.

Market participants said while the dynamics of state and national elections are different, two-thirds win for the BJP in the state elections will be the tailwind for the market and a one-third will be a little negative and raise concerns. But a loss in all the three states will significantly lower expectations of the general elections – and the market.

“While this itself carries a premium, it is not the premium that the market has accorded for an economic policy-driven change. This, in our view, suggests that if the current government does come back to power, the markets response will be a stability premium rather than ‘a favourable change in economic policy’ one,” said Edelweiss in a note to investors.