Markets always get election results right, but investors don’t

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Indian elections are always a captivating spectacle. Given that India a multi-party democracy, predicting the winnder and loser is a challenging game. However, there’s no shortage of psephologists, both professional and amateurs, who indulge in this exercise.

Since 1991, the results have been linked to economic programmes. As a result, stock market punters have shown greater interest than before.

Having participated in elections since 1977—as an onlooker, a voter (1983), and subsequently as a market participant (1991)—I’ve had a ringside view of how markets behaved during the election period leading up to the formation of a new government.

Since 1991, two principal forces (Congress and the Bharatiya Janata Party) have ruled for most of the time, except for a brief period of 2 years during the late 1990s. While Congress was in power for 15 years, BJP has been slightly longer in power at 16 years, with the Third Front having a short stint of 2 years.

Let’s delve into market movements during each of the elections, beginning from 1991.

1991: The prospective PM candidate, Rajiv Gandhi, was assassinated during the first phase, and the elections had to be postponed and held in two more phases. There was uncertainty all around, but the markets held steady and jumped just before the results day since they sensed a stable government would be formed. Congress was the single-largest party with 244 seats, BJP was the runner-up with 120. This government lasted its full term of 5 years, and this period saw the birth of economic liberalization.

1996: While investors expected Congress to come back to power since the liberalization measures initiated by Manmohan Singh and Narasimha Rao had started yielding results, the markets indicated otherwise. Markets won yet again. The BJP was the single largest party with 161 seats, while Congress was relegated to 2nd place with 140 seats while the Third Front had around 78 seats. It was a hung parliament and it was reflected in the market moves thereafter too.

1998: While investors were confused, prices had started an uptrend, hoping that BJP would emerge as the single largest party by far, which is what happened. BJP improved upon its tally and reached 182 seats while Congress had to settle for 141. This government too would collapse within 13 months since there was no majority even with allies, but the market expected good governance under BJP, hence the buoyancy.

1999: Betrayed by its allies and reeling under U.S. sanctions, the country went in for polls between September and October, 1999. While investors expected a hung parliament yet again, the country chose the BJP, which, with the same number of seats but more allies, could form a stable government. Markets had sensed the possibility and had built up momentum before the government was formed and took off soon after.

2004: This was a landmark election in more ways than one. The government was riding on the coattails of the ‘India Shining’ campaign, while the opposition was disgraced and weak. The economy was doing well, the PM was universally popular, hence he advanced the elections by 6 months. Opinion polls were giving NDA around 340-350 seats and the punters (including me) had built up huge long positions in anticipation of bumper profits on results day. However, the markets had a mind of their own. Since the first phase on April 20, the markets were beset with selling pressure and by the day of the results, they were falling steadily. It was a shock result. Congress was the winner albeit by a very small margin of just 7 seats while the BJP got 138 seats. But the damage was done. The markets cracked hugely, by about 16% on a single day since everyone was overleveraged and had to sell in panic. But the market had spoken before the first round itself. None of us saw it coming.

2009: These elections were held soon after the Global Financial Crisis and the economy was limping back to normalcy. Investors felt we would have a hung parliament just like the 1990s since economic conditions were dismal. Yet the market was resilient going into the polls and when the results came on the weekend, it was advantage Congress with 206 seats while the BJP was second at 116 seats. The markets leapt 16% in a single day as bears ran for cover; yet again investors missed the market’s signals.

2014: While the challenger (Mr. Narendra Modi) was the market’s favourite, there were still doubts among the punters whether the BJP would be able to pull off a majority on its own. Yet once again, the markets showed the way by being very steady leading to the various phases, then took off just before the final phase and then there was no looking back smashing many records in the process.

2019: The election campaign started off on a subdued note seemingly, with the challenger (Congress) having a chance, but the Balakot incident turned the tide in favour of the BJP significantly. The momentum carried to 5 of the 7 phases. The market exhibited some nervous moments in the interim but recovered in the last phase to give a spectacular victory of 303 seats to BJP—the highest-ever in 35 years.

2024: This time too, we have 7 phases. The opinion polls are all unanimous that BJP alone is likely to get a minimum of 330 seats. Punters too are ‘all in’ with highly leveraged bets. No one is expecting anything less than the 303 seats which the BJP got last time. Effectively, the punters don’t have a stop loss. While the Sensex, Nifty and, Bank Nifty were volatile within a range till the completion of the 5th phase, the Sensex and Nifty have suddenly perked while Bank Nifty has lagged. Note that the fiinancial sector has a weightage of around 34% in the Nifty. In the past 25 years, Bank Nifty has been a better weather vane of the direction of the markets. Interestingly even in the Nifty, of the top 25 stocks which have a combined weightage of nearly 80%, only 4 stocks hit all time highs last week, clearly indicating that the “smart money” is still not enamoured with the latest irrational exuberance.

The market has got it right all the time since 1991, across eight elections. The current price action suggests the market is dangerously poised for the bulls due to heavy leverage and unwillingness to consider any other alternative except the BJP winning 330+ seats. The market is telling us something else. Brace for impact on June 4th.

(The writer is an independent market analyst)