Markets always get election results right, but investors don’t

Indian elections are always a fascinating spectacle. As India is a multi-party democracy, predicting winners and losers is a tricky game. But there are plenty of electoral scientists, both professional and amateur, who are keen on the task.

Since 1991, results have been linked to economic policies, which have resulted in stock market investors showing greater interest than before.

I have attended elections since 1977, as an observer, a voter (1983) and then as a market participant (1991), and have seen up close how markets behave during election periods leading up to the formation of a new government.

Since 1991, except for a brief two-year stint in the late 1990s, two major forces have dominated the country for most of the time – the Indian National Congress and the Bharatiya Janata Party. The Indian National Congress was in power for 15 years, the BJP slightly longer at 16 years, and the Third Front only briefly in power for two years.

Let’s take a closer look at how the market has performed during each election starting from 1991.

1991: Prime Ministerial candidate Rajiv Gandhi was assassinated during the first phase of elections, which were postponed and then held in two further phases. Despite the uncertainty, markets remained stable and surged in the run-up to the vote on the prospect of a stable government. The Indian National Congress became the single largest party with 244 seats, while the BJP came second with 120. This government lasted for a five-year term and saw the start of economic liberalisation.

1996: As the liberalisation policies initiated by Manmohan Singh and Narasimha Rao started to bear fruit, investors expected the Congress to return to power, but the markets showed otherwise. The markets won again. The BJP emerged as the single largest party with 161 seats, the Congress slipped to second place with 140 seats, and the Third Front had around 78 seats. This was a hanging Congress, and the market movements thereafter reflected this.

1998: As investors panicked, stocks began to trend higher on hopes that the BJP would emerge as the single largest party, which it did. The BJP increased its parliamentary lead, winning 182 seats compared to the Congress’s 141. This government also collapsed within 13 months as it did not have a majority, even with its allies, but markets thrived on hopes of good governance from the BJP.

1999: Betrayed by its allies and reeling from US sanctions, India went to elections in September and October 1999. Investors expected another confrontation between the ruling party and the ruling party, but Indians chose the BJP, which had the same number of seats but more allies and could form a stable government. The market sensed the potential and was gaining momentum before the government was formed, and it picked up steam soon after.

2004: This election was landmark in many ways. The government was riding high on the momentum of its “India Shining” campaign, while the opposition was in disgrace and weak. The economy was doing well and the Prime Minister was widely popular, so we brought the elections forward by six months. Opinion polls were predicting the NDA to win around 340-350 seats, and investors, including myself, had built up huge buying positions, anticipating huge profits on the day of the results. But the market had a mind of its own. Right from the first phase on April 20, the market was plagued by selling pressure and was steadily falling by the time the results were announced. It was a shocking result. The Indian National Congress won, albeit by a slim margin of just 7 seats, while the BJP won 138 seats. But the damage was done. The market crashed hard, dropping around 16% in a single day as everyone was over-leveraged and had to sell in panic. But the market was talking even before Round 1 began: Nobody expected it.

2009: This election came on the heels of the Global Financial Crisis and the economy was returning to normal. Investors thought the dire economic situation would lead to a hung Parliament like the 1990s. But markets were resilient in the run up to the vote and when the results were in at the weekend, the Congress was ahead with 206 seats and the BJP in second place with 116. The market rallied 16% in one day as bears fled, but investors once again missed the market signals.

2014: Though the challenger (Narendra Modi) was the market favourite, doubts still lingered among bettors as to whether the BJP could win a majority on its own. However, the market again showed a very steady path through the various stages, surging just before the final stage and never looked back thereafter, breaking many records in the process.

2019: The election campaign started off seemingly subdued, with the challenger (Indian National Congress) having a chance, but the Balakot incident tipped the scales significantly in BJP’s favour. This momentum continued through five of the seven phases. Markets saw tense moments during that time, but recovered in the final phase to give the BJP a stunning victory of 303 seats, its highest in 35 years.

2024: There will be seven phases this time too. Opinion polls are in agreement that the BJP alone is likely to win at least 330 seats. Bettors are also “all in” on their highly leveraged bets. No one expects the BJP to win less than the 303 seats it won last time. Virtually, bettors have no stop losses. Sensex, Nifty and Bank Nifty were fluctuating within certain ranges till the completion of the fifth phase, but suddenly Sensex and Nifty rose and Bank Nifty lagged behind. It is interesting to note that the financial sector accounts for about 34% of the Nifty. For the past 25 years, Bank Nifty has been a better weather vane to indicate the direction of the market. Interestingly, even in the Nifty index, out of the top 25 stocks, which together account for about 80% weighting, only four stocks hit all-time highs last week, clearly indicating that “smart investors” are not yet carried away by the recent irrational exuberance.

Markets have been right in predicting 8 elections since 1991. Current price action shows that the market is in a dangerous situation for bulls due to huge leverage and unwillingness to consider any option other than BJP winning 330+ seats. Markets are telling you otherwise. Get ready for a shock on June 4th.

(The author is an independent market analyst)