Mint Explainer: What's in store for investors during and after the election?

Lok Sabha election 2024: Voters stand in queues to cast their vote during the second phase of the Lok Sabha election at a polling station in Siliguri on Friday, April 26. (ANI)
Lok Sabha election 2024: Voters stand in queues to cast their vote during the second phase of the Lok Sabha election at a polling station in Siliguri on Friday, April 26. (ANI)


With the stock market having already factored in policy continuity, there's a sense that investor anxiety is low ahead of the general election. There may be some profit-booking, however, as many sectors are priced to perfection

Investors seem to be staying on the sidelines amid the ongoing general election. While opinion polls favour the Bharatiya Janata Party-led National Democratic Alliance, investors are wary of a repeat of 2004, when the Indian stock market crashed after the Congress-led United Progressive Alliance won the election. That crash had led to a bear market that lasted around two years. 

Mint takes a close look at what's in store for investors in the coming weeks and months following the ongoing national election, how the market behaved before and after previous elections, which sectors could shine after the poll results are declared, and how domestic and foreign flows will be affected.

What should investors expect this time around?

With the market already having factored in policy continuity, there's a sense that investor anxiety is low this time around. “The pre-election rally started in earnest after the assembly election of November 2023, with investors having faith that the current government will return to power," said Viral Shah, senior executive vice-president and head of brokerage at 360 ONE Wealth.

The Nifty 50 index, which was trading in a wide band of 16,000 to 18,800 points, broke free and posted double-digit returns in a short span of time, he noted. Over the past month the index has risen by 2% despite regulatory scrutiny in the broader market acting as a dampener.

“While the market seems to be discounting the election outcome, anticipating policy continuity, it still needs to be wary of earnings momentum, which could undermine the overall optimism," said Kranthi Bathini, director, equity strategy, at WealthMills Securities. 

Having said that, there could be some profit-booking given that several sectors are priced to perfection. Any slippage on Parliament seats for the NDA in the election could also dampen investors' spirits. For now, according to Kotak Institutional Equities, the NDA is projected to win 366 seats in the ongoing election, up from 354 in 2019.

The India VIX volatility index—considered the market's “fear gauge"—rose in the month leading up to the elections in 2004 and 2009, and dropped sharply ahead of the 2014 and 2019 polls.

With all the retail excitement and positive vibes lately, it's possible that India VIX will drop this time, too. This could mean less stress for investors, possibly resulting in solid returns for the Nifty 50, especially with banking stocks leading the rally, according to Koushik Mohan, lead analyst at Ashika Institutional Equities.

How did markets behave ahead of previous elections?

In 2004, the Nifty 50 delivered negative returns in the month preceding the national election, whereas ahead of the 2009 and 2014 polls it delivered positive returns. 

However, 2019 was different, with no market rally before or after the polls. And let's not forget that covid later put a damper on investor sentiment. The 2019 election was held after demonetisation in 2016 and GST in 2017. Both these events left a lasting change in the economy and hence the impact on the market was muted, said Shah.

All said, the Nifty 50 has historically traded modestly in the month preceding general election results, but domestic sectors have outperformed. Foreign institutioal investor inflows have historically picked up and volatility has usually risen in the run-up to election results, Goldman Sachs said in a report dated 19 April.

Which sectors could come out on top after the election?

The general consensus is that capital goods, infrastructure, real estate, logistics, ports, electronic manufacturing services, hospitals, tourism, automobiles, new energy, e-commerce, and telecom will perform well after the polls. Many stocks in these sectors are enjoying a good run and hitting multi-year highs with much of the optimism factored in.

Some stock-specific movement is likely as the government unveils its plans for the next five years in the first 100 days after taking up office. Market experts believe that apart from manufacturing sectors such as green energy, water treatment, supply chain, semiconductors, and electric vehicles could also gain momentum following the election.

What will happen to flows?

Domestic institutional investment flows remain strong, with net equity inflows continuing to rise thanks to optimism around the India story. In contrast, FIIs flows have been slightly weak so far this year. 

As of 29 April, DIIs have bought equities worth 151,191.29 crore, while FIIs have bought equities worth just 317.77 crore. That said, the expectation is that buying activity from both DIIs and FIIs will increase after the election.

“If the current government comes back with a large mandate, they (FIIs), too, will start making a comeback," said Shah. As FIIs have traditionally had large holdings in the banking space, the BFSI sector could benefit. Many private-sector banks that have under-performed the broader market may stage a comeback. 

Consumption could also emerge as a dominant theme, aided by volume growth, and the government’s infrastructure push could also give momentum to cement stocks, Shah added.

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