The election season brings an element of uncertainty and volatility to the stock market. That is despite most opinion polls suggesting a victory for the Bharatiya Janata Party-led National Democratic Alliance in the general elections in 2024. That phase should continue until the final election results are announced on 4 June 2024. Several other factors would affect the stock markets, too.
Here are five ways we can assess the impact of the elections on the stock market:
1. Dealing with Uncertainty
Stock markets do not like uncertainty. A lot of analyst recommendations and macroeconomic projections are based on an assessment of future profit estimates. However, it is not easy to make consistent projections during an election and in the aftermath. Despite predictions of a clear mandate to the incumbent government, analysts will wait for the results. Government policy is a function of the type of election mandate. If it is a coalition government, there is a common minimum programme and a lot of compromise. If it is a government with an absolute majority to one party, there is a lack of consensus but clear policy decision-making. Besides, opinion polls are notoriously wrong on occasions. In 2004, very few pollsters predicted a loss for the Atal Behari Vajpayee government. Based on opinion polls, it is hard to put any money at risk.
2. Volatility rises
Stock markets are already near record highs. At the same time, everybody knows that the election commission's code of conduct is in force. As a result, there cannot be any futuristic statements from the government. Overall, the anticipation of a clear mandate to the Modi government has already resulted in prices soaring. Traders would notice a calmness ahead of voting that starts in India's elections on 19 April. If you look at the chart of the India VIX index, it spikes to the 20-mark around the voting phases in April. In 2014, it was 22.69 on 4 April, while in April 2019, it was around 19. It is surprisingly calm around 11 now. That shows the stock market's anticipation of a decisive election mandate. The other important indicator in the financial markets is the bond market. The 10-year government bond yield is around 7.1%, like the year-ago period. If you compare it to April 2014 and 2019, bond markets are calmer now. Yields were higher at 8.4% and 7.4% respectively then. You can see that the volatility level in equity markets was much higher when bond yields were higher.
3. Speculation about policy decisions
As people vote, political parties up the ante. They make statements that could influence policy decisions in the future. The stock market closely watches election manifestos to understand the policy direction. While many promises are made in a political party's manifesto, proposals usually trigger media debates. The discussion on whether the government should distribute cash to people experiencing poverty or spend more money on social and physical infrastructure that triggers economic activity matters to traders and investors. Everybody prefers a government that ensures higher spending on infrastructure. The sectoral activity in the markets will focus on such bits of information. At the end of it all, investors are looking to understand the impact of government policies on policy rates and inflation. If the new government's policies are towards spending more and borrowing more, that could trigger an adverse reaction in the market. However, it could be positive if the government is looking to live within its means by keeping the market borrowing in check.
4. Foreign investor sentiment
The conflict zones in the world continue to expand. That has created problems for the global supply chain and added to the cautious international investor sentiment. The strong performance of the US economy and elections in November in the US would be keenly watched—the impact of the US policy decisions on global trade matters to the market sentiments, too. The surge in the US dollar value due to firm interest rates and more substantial job growth pushes many global investors to dollar-denominated assets. India is a preferred long-term investment destination. However, relative valuations in India are much higher than the historical premium Indian equities enjoy. An election result that hands out a mandate to a decisive government would push more investors to India.
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Conclusion
Lead indicators suggest a sense of calmness in financial markets as India votes in the general elections in 2024. If the result on 4 June 2024 is in line with expectations, stock markets could continue to gain ground. If there are setbacks to the expectation of a decisive government, it could trigger a sharp fall in the short term. However, history shows that investors tend to take a step back and understand the policies of a new government before returning to pick up bargains.
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