Indian Elections 2014 and the Equity Market

We are about to enter the final phase of 16^th Lok Sabha election. Just a couple of weeks left before we get the final results from this election. There has been a huge uncertainty among people regarding which party will come to power. There is also an increase in volatility in the equity markets in the recent months.

Historically, we have seen Sensex and Nifty behaving differently pre and post-election based on exit polls, certain result expectations and general market sentiment.

Let us first analyze how the stock market behaved in the last three elections.

In 1999 elections, the BJP led National Democratic Alliance (NDA) won the re-elections after losing majority in the election earlier in the same year. Atal Bihari Vajpayee took the lead and formed the government. Markets were down before the elections but as NDA formed the government again, this time a stable one, it was highly favored by the stock market and market rose significantly.

In 2004, markets were strong before the elections. As the results were announced, the then favorite NDA lost majority and market crashed drastically on this big upset. Congress led United Progressive Alliance (UPA) formed the government with Manmohan Singh as their Prime Minister. But that did not help the market to recover. Later, the government came up with strong economic reforms which stabilized the markets and slowly an uptrend started.

In 2009, market was in an uptrend before the elections. On the results day, UPA won the election and formed a government easily with the help of the allies with Manmohan Singh continuing as the Prime Minister. Markets favored this stable government and the rally in the stock markets continued post elections as well.

Election 2014: Expectations

This election is one of the biggest election in the history of India with around 800 million voters and there are a lot of expectations from it. The recent rally in the markets pre elections is backed by “Modi Wave” and foreign institutional investors who are anticipating Bhartiya Janta Party’s (BJP) candidate Narendra Modi to become the new Prime Minister of India. There are high expectations of growth and development under his rule with his economic policies.

From market point of view, the expectation is the continuation of the recent rally in the short term if NDA wins the elections and forms a stable government. On the contrary, if UPA gains majority, we might see short term down moves. Also if no party is in a condition to form a government, we can even expect equity markets to crash by more than 15% post the election results in this month. The behavior of the markets in the long term solely depends on how parties stand on their promises and the economic policies they implement.

How to trade in this volatility?

It is expected that equities will behave randomly till the results are out. Also the results from various exit polls might affect intraday trading. The results will be announced on Friday, May 16. The results from all states might not be out till the equity market is open. So we can expect the actual move to happen on Monday, May 19.

For intraday traders, it would be wise to buy the put or call options if they wish to take directional calls in market as they would be aware of the maximum risk than trading naked future contracts. Also trading with a strict stop loss and not remaining stuck in the wrong direction for a long time will not hurt their bank balance. For long term investors who have long term positions in equity market, if the market goes down, it can affect their portfolios heavily. But these would be short term moves as a stock’s performance will depend on its company’s performance and country’s economy. However, it is advisable to buy a put option in order to protect their portfolios from these temporary drastic moves.

To conclude, there will be opportunities to make millions in this market but even more chances of losing much more. A disciplined trader/investor will understand this big opportunity and make the most from it. All the best!

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