Post this, India would know whether the new government is formed or the existing government gets re-elected. According to experts, it is most likely that the existing government would be re-elected.

General elections do impact stock markets as the government releases its full budget and also comes with new policies. Hence, it makes complete sense to study the performance of the Indian stock market during the previous election years. 

In this article, we would be understanding the impact on the performance of Nifty 50 during pre-election and post-election phases. Moreover, we would also understand which sectors have historically benefited in the post-election era.

Note: Past performance does not guarantee future results.

The study

Most stock market participants position their portfolio ahead of general elections based on their expected outcome of the elections. So, to understand how stock market has performed during election times, we have taken the last five election years.

Among others, only the 1999 election year results came out in October. The election results in other four election years came out in the second half of May. To gain better insight, we have divided this study into two parts.

In the first part, we have analysed the performance of Nifty 50 30 days, 15 days, and 7 days before and after the election results outcome. Also, we have analysed Nifty 50’s performance for the rest of the year post election outcome.

In the second part, we have analysed the performance of sectoral indices for the rest of the year post the election results outcome.

Nifty 50 Performance 

The year 1999 and 2004 were the only instances where the Nifty 50 saw negative returns before election results. The election results were announced on October 5, 1999 and May 13, 2004, respectively. In 1999, Nifty 50 delivered negative 1.24%, 1.07%, and negative 0.19% in 7 days, 15 days, and 30 days before election outcome.

While in the year 2004, it delivered negative 5-7%. In the other three instances (2009, 2014, and 2019), the Nifty 50 delivered positive returns.

Apart from 2014, the Nifty 50 showcased mixed performance in 7 days, 15 days, and 30 days post-election results. However, if we look at the returns for the rest of the year post election outcome, all delivered positive returns, but 2004, 2009, and 2014 witnessed double digit returns of 33.8%, 21.3%, and 15.1%, respectively.

We can consider 1999 as exception as Nifty 50 only had 3 months post-election outcome to deliver. Still, it delivered better returns (6%) than 2019 (4%). 

The volatile 2004

Interestingly, before delivering handsome returns of 33.8% in 2004, the Nifty 50 crashed nearly 8% the next day of election results. In fact, in the following week’s opening session Nifty 50 delivered negative returns of 19% returns.

This came after the surprise defeat of the National Democratic Alliance (NDA). However, things began to turnaround as investors gained confidence as Manmohan Singh was named as the Prime Minister.

The election year 2019 was sluggish among the five as Nifty 50 merely matched the savings account rate of about 4%. This was amid global markets were yet to recover post the 2018 crash triggered by the US-China trade war.

Even the US Fed was continuously hiking the interest rate adding pressure on the stock markets in 2019. Indian markets, on the other had, underperformed due to weak economic growth.

Sector performance

Irrespective of the trend before elections, the Consumer Durables, Information Technology, Metal, and Banking sectors have always made it to the top five list of best performers after the elections. Indeed, the IT and Consumer Durables sector had been among the top five in three out of the last four times in the remaining period post the election results. And sectors like Metal, Banks, Financial Services, Auto, and Media made it to the top five in two election years for the period after the election outcome.

Final thoughts

Indeed, general elections is an important event from the stock market point of view. The history explains that the election year as never been a negative year in past five instances. On sectoral front, consumer durables and IT seem to do well in three out of four election years. 

Having said that, the current valuations (price to earnings) of IT and consumer durables is at 30x and 74x, respectively, while its 10-year median is at 22x and 56x, respectively. This shows that at the moment these two sectors seem to be expensive.

So, what are your thoughts on markets post-elections and which sector or stock do you think is likely to do well? Do let us know in the comment section.

Happy Investing!