A study of average stock market returns in the last five general elections found that the BSE Sensex and key sector indices turn positive three months after the election results. Sector-wise, sector-wide returns are positive six months after the election results. According to JM Financial, historically, in past cycles, small and mid caps have outperformed large caps after the election results in every period. Will history repeat itself?
The election will end on June 1, with vote counting on June 4. Markets are expecting the incumbent BJP to win 300-320 seats, according to BT Markets research, which would surpass the 303 seats won by Narendra Modi’s party in 2019.
According to JM Financial, while the BSE Sensex fell an average of 0.5% in the first month after an election, the BSE Small Cap index surged 10.7% and the BSE Mid Cap index rose 7.3% during the same period. The BSE Realty index, which tracks commercial and residential real estate developers, returned 16.5%, the BSE Power index returned an average of 10.9% and the BSE Metal index returned an average of 8.6% in the first month of the past five elections.
Information technology, real estate and consumer durables stocks, on average, performed well in the three months following the election. IT stocks, along with small and mid-cap stocks, delivered outsized returns in the six months following the election, according to data from JM Financial.
Will history repeat itself?
“We recognize that the above approach has resulted in uniform performance across sectors that may not be repeated in the future,” JM Financial said.
The brokerage noted that analyzing returns after the 2019 elections would not tell the true story, as fears of a global economic slowdown in August 2019 impacted market performance. Instead, it looked for periods when market conditions were similar, such as the 2014 general election, when stock markets were already doing well just before the election.
“At that time, we observed that sectors such as auto, consumer durables and healthcare outperformed benchmark indices while at a broader level, mid-cap and small caps outperformed large caps. We believe it is time to buy on the dips as a healthy rally is expected following the June 4 election results,” JM Financial said.
With the continuation of the policy, the government’s main focus will remain on infrastructure development and manufacturing, benefiting the defence and capital goods sectors.
“However, unlike past periods, this cycle we favor large caps over small and mid caps for valuation stability in 2024. At the sector level, we see valuation stability in the private banking and consumer discretionary sectors, which are expected to outperform their benchmarks in the near term,” JM Financial said.
Currently, the Nifty is trading at 20 times forward P/E, close to one standard deviation from its long-term average, which JM Financial believes is reasonable.
“Following the election outcome, we believe market attention will shift to the Union Budget, which is likely to be presented in July,” it said.
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