With the 2024 general election underway and incumbent Prime Minister Narendra Modi vying for a historic third term, an analysis by FidelFolio suggests that the current general election and its outcome would not have any major long-term effect on the equity markets.
With few exceptions, the Nifty indices have generally shown an upward trajectory around election periods, according to the report “Deciphering Market Trends: Navigating Pre-Election Dynamics and Global Turbulence” by FidelFolio.
The report projects that the Nifty 50 index could be between 30,000 and 35,000 points in the next three years. Over the last 30 years, the Nifty index has demonstrated resilience, delivering a compound annual growth rate (CAGR) of approximately 13 percent despite market challenges and volatility.
Even during times of political instability, such as the period of the weakest coalition government from 1996 to 1998, the index still managed to yield slightly positive returns following significant volatility. This historical perspective suggests a robust long-term outlook for the equity markets despite election-related uncertainties.
“As the country gears up for another crucial election, investors are keenly eyeing the market’s performance, wondering whether it will witness a pre-election rally or correction. However, the global scenario paints a contrasting picture. The growing turbulences in the Middle East, the Russia-Ukraine conflict, and the poor economic indicators from the major economies could impact the Indian stock market. Subsequently, the customary three- to-six-month post-election review may not be as applicable this time around since global issues could soon eclipse the consequences of the election outcomes,” said Kislay Upadhyay, smallcase manager & Founder of FidelFolio.
The 2024 Lok Sabha elections began on April 19 and will span a 44-day period, concluding on June 1. This major political event, which takes place once every five years, holds significant importance for most Indians as it influences various aspects of their lives, including their savings and investments. The election’s outcome can impact economic policies and market sentiments, making it a pivotal event for the nation’s future direction.
The general election year usually brings positive news for financial markets, as they have historically delivered good returns during these periods. In fact, the past four general elections saw the markets providing double-digit returns. However, the downside is that most of these returns might already be priced in ahead of the current election cycle, meaning that any further market gains may be limited as the election approaches.
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In 2014, anticipation of a new government and its potential impact on economic growth led to a pre-election rally in the markets, noted FidelFolio. This rally was evident in indices such as the Nifty 100 Quality 30 and Nifty 200 Momentum, both of which experienced significant improvements. The Nifty 100 Quality 30 index saw gains of 13 percent and 25 percent after 3 and 6 months of the elections, respectively, compared to previous levels of 6 percent and 10 percent. Meanwhile, the Nifty 200 Momentum index posted returns of 14 percent and 35 percent after the same time periods, compared to prior levels of 11 percent and 13 percent. These gains reflected the positive sentiment surrounding the anticipation of a new government‘s potential influence on economic policies and growth, it pointed out.
However, in 2019, while expectations of the reigning government remained high, the lack of anticipation of any significant changes in economic policies led to a slight negative trend in indices across almost all sectors, it observed.
Looking ahead to the 2024 election, there’s a general consensus that the current government will retain power. While this may provide stability and continuity, expectations for major shifts in government policies or thrust areas are miniscule, it added.
Sectoral Predictions
According to FidelFolio, the performance within various sectors during the past two elections varied notably. The Nifty Healthcare index experienced a significant upward trend, with gains of 20 percent and 42 percent after 3 and 6 months of the elections, respectively, compared to initial increases of 2 percent and 8 percent. In contrast, the Nifty Energy index faced a negative trend, with returns of 0 percent and -1 percent after the same time periods post the elections, a sharp decrease from the initial 27 percent and 25 percent. These sectoral differences suggest that the elections had distinct impacts on different parts of the market.
Expressing his optimism about how his portfolio will be impacted by the elections, Upadhyay further added, “We firmly believe that this time quality stocks with strong fundamentals (companies with high capital efficiency and growth) will be attractive and will gain market share. In the recent past, quality stocks have not performed and will perform now”.
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Although, this year, it is expected that quality stocks will do well in banking and financial services, diagnostic, and the consumer discretionary segment. However, investors should remain vigilant and adaptable in response to the ever-evolving global dynamics, advised the report.
