Stock Markets are no strangers to volatility. Every year companies rise and fall, fail and succeed in the stock market, with their many investors walking away with a profit or shouldering a loss depending on how fate favours them.
Elections increase the volatility of the market further than it usually is. On May 29th, i.e Wednesday, Indian stock markets witnessed a huge drop, with the S&P BSE Senex with a loss of 668 points, NSE Nifty 50 by 203 points, etc. However stocks like Reliance, Airtel, Indraprastha Gas, ONGC, etc have shown remarkable growth and have outperformed their competitors in their industries.
Why do Elections contribute to Volatility?
Investors in companies prefer stability. This translates to their investment increasing steadily over time and reduces the chance of making a loss. When certain events like elections are near, uncertainty looms over the market.
Although complex, this is because investors usually prefer to invest in companies which stand to benefit from policies established by the Government of the day. If the policy of the government stands to change, expectations change about which companies stand to benefit from potential policy changes by the new government. Conflict and differences of opinion about this results in investors investing and divesting out of companies at the same time, contributing to an increased volatility of the market during the election season.
How the Market changes based on the election and Political Climate:
Over the past six months, ‘Modi Stocks’ that is, stocks of companies which stand to benefit and are linked to the policies of the present BJP Government have increased by an average of 50%. 90% of these Modi stocks have outperformed the Nifty50 during these six months, making them extremely attractive for some to sink investments into.
Given this backdrop, if the Bhartiya Janata Party secures a third term, it is reasonably expectable that these stocks will continue to surge and benefit from the policies of the government. Examples include corporate houses and companies linked to various kinds of defence, new energy, tourism and infrastructure such as Reliance, Bharti Airtel and Public Sector Undertakings such as ONGC and NHPC.
Similarly if the ruling party changes as a result of the election, these Modi stocks may not perform as well as they would otherwise. Stocks like Hindustan Unilever, vehicle manufacturers, etc could potentially rise due to the potential welfare policies of the I.N.D.I.A alliance.
How the stock market fares is extremely complex on its own, even without elections serving as a spanner in the works. Electoral outcomes not only determine and signify societal and political changes but also have the potential to change economic variables, leading to investors expecting a myriad of outcomes and hence investing and divesting accordingly. This short term ‘election season’ volatility isn't new. After the UPA alliance bagged a surprising victory in 2004, the stock market ended up with a 10% fall. However, these short term volatilities are to be expected and are not an impediment to long term market health.
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