Don’t wait for the elections to invest

Stock markets have been volatile over the past few weeks, driven by local and global macro concerns. Analysts have been saying the volatility is likely to continue till the general elections next year. In line with these, we have been getting questions from our investors, asking whether they should wait for the election to get over before they invest.

So we decided to put out the movement of stock market before and after general elections. The following data shows the reaction of stock markets immediately after election results.

What does the above data tell us? That there is no real post election trend. It doesn’t pay much to start investing only after elections. 1996 and 1998 saw a fall. 1999, 2004 and 2014 saw tepid to reasonable returns. 1991 and 2009 saw a jump. In years such as 1991 and 2009, the high returns came by from the market for other reasons. For instance 1991 was a year of economic liberalisation, specifically with respect to foreign investment policy. 2009 was a year of recovery post the global financial crisis. Barring this it was business as usual in the markets save for short-term gyrations.  

But what happens if we take a slightly longer period, pre and post elections? Let us now look at how the Sensex moved within 6 months before and after the elections.The above graph, tells us two things: one, if at all there is any short-term rally, it has been more in the pre-election phase than post. The average returns in the pre-election phase is higher as seen in the table. That basically means markets like to bet before the election is over. Two, barring the years of abnormally high returns (1991 and 2009, as discussed earlier, were driven by other events) there is no clear trend to the market rallies in the election year.

Now all this suggests that it is more of a guessing game and returns can taper off (1996 for example) post results. Hence, rather than betting on election results or waiting it out, it may be prudent to simply use the volatility to keep averaging pre and post election. When the volatility is caused by other macro concerns, there is a higher chance of buying the equity market at a discount and thus reduce your unit cost. This year, the global concerns of crude and dollar strengthening and it impact in India are key macro factors impacting markets. Focus on the volatility caused by these factors to average.