Explained: Why Nifty, Sensex rose after every Lok Sabha Election since 1999

India’s key stock market indices, the Nifty and Sensex, showed a rise six months after all the four Lok Sabha elections between 1999 and 2014, compared to the previous six months, according to an IndiaSpend analysis.

We analysed Nifty and Sensex levels on three key dates--six months before the first day of polling (pre-election), the first day of polling (during the election) and six months after the first day of polling (post-election), over the last four Lok Sabha elections.

The Nifty and Sensex showed an average rise of 40.8% six months after each of these general elections, as compared to the previous six months.

The Nifty, short for the National Stock Exchange (NSE) Fifty, was launched on April 1, 1996, and represents the weighted average of 50 major Indian companies across 12 sectors that are listed on the NSE. The Sensex, short for the S&P Bombay Stock Exchange (BSE) Sensitive Index, which is an index of 30 major Indian companies listed on the BSE, was established in 1986.

Of the four Lok Sabha elections held after the establishment of the Nifty, two (2004 and 2009) saw the election of an Indian National Congress-led United Progressive Alliance (UPA) government. In 1999, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) formed the government, despite falling short of a majority. In 2014, the BJP won a simple majority and formed an NDA government along with allies. In all four cases, both the Nifty and the Sensex rose.

The Nifty saw the highest rise after the 2009 elections, when the UPA government was re-elected. The index was at 5,142 on October 16, 2009, compared to 3,269 on the same day a year before--a 57.3% increase.

The Sensex, too, saw its highest post-election rise after the 2009 elections, going from 10,581 on October 16, 2008, to 17,323 on October 16, 2009--a 63.7% increase.

Source: National Stock Exchange & Bombay Stock Exchange
Note: For 1999 data, the first day of the election is September 5, 1999. Six months pre-elections and post-elections were March 5, 1999, and March 5, 2000, respectively

That the Nifty always rises post-election as compared to before and during elections, was also highlighted in a December 2018 report by Mumbai-based wealth management and investment banking firm Anand Rathi Wealth Services.

A stable government is desirable, which means that a political party or its alliance needs to win majority for the markets to respond favourably, says the report. “People want a stable government, so if any political party or alliance crosses 272 [halfway mark in the 543-seat Lok Sabha], irrespective of who it is, then we will have a stable government. It is not about UPA or NDA winning a majority. If the market sees a stable government, it will build expectations of stable policies and the market will start rising.”

“Over every five year period, you will find that the Nifty has actually delivered 100% returns from election years. Hence if there are stable five year governments and stable policies, markets will rise,” a source at Anand Rathi told IndiaSpend.

Another reason for markets rising, irrespective of who wins, is that the election is a very big economic event in India’s consumption-driven economy, the source said. A lot of the money spent by political parties and governments around elections eventually goes to people in both rural and urban India. People will eventually spend this money and this drives consumption. Therefore, the earnings of listed companies are likely to go up, which is nothing but the mirror of their returns. “So, who is elected doesn’t really matter. This has happened historically and we believe strongly that this will continue to happen.”

“There is also [a positive sentiment of] hope [around elections] that something different is going to happen in the next five years,” said the source. “[There is an expectation that] the new elected government is going to come up with new policies and therefore you find that markets start going up,” he added.

The report, which also analysed 48 state assembly elections that took place between 2011 and 2018, found that the outcome of 43--or 90%--indicated that voters followed logical reasoning before voting for a party. Voters in India reward or punish incumbent governments by logically assessing the government’s report card, it says.

“We saw that people are ready to elect strong leaders. For instance in Punjab, we found that despite winning several other states at the time, the BJP lost here [in 2017] because there was a strong leader in [now Congress chief minister] Captain Amarinder Singh. So, people did not vote only for a particular party. People wanted someone who can take on this leadership role and deliver,” the source said.

The election results are more significant for markets if there is a “logical” or “favourable” outcome, according to the report. “There are three possible outcomes in the [current Lok Sabha] election. One is the same [BJP-led NDA] government returning, second is a Congress-led UPA and then a third-front government, with no single party winning a majority. We logically think that the BJP will win re-election,” explained the source. “We found that out of these three [options], the first one is the most logical for people. There is hope and expectation of having a strong leader.”

Should an alliance headed by either of the two key political parties, the BJP or the Congress, come to power, the markets will rise significantly, the source said, adding, “However, if a third front [mahagathbandhan] comes to power, then it will be a disaster [for the markets] because then you will not have strong leadership and there will be no stable policies as well. We have seen this historically.”

In the past, stock markets have rallied significantly six months before elections, and post a “favourable” result, the rally has continued further. For instance, in 2009 for a 12-month period during the election (six months before and six months after the start of polling), the market delivered almost 57% absolute returns. However, after the 2004 general elections, where the outcome was not as expected--the Congress party emerged as the single largest party and formed a UPA government, amid widespread expectations of another NDA government--for a 12-month period around the election, the market delivered 16% absolute return, the report says.

Republished with permission from IndiaSpend. You can read the original article here