A 12% rise in the Sensex to record levels above 22,000 is the second-biggest pre-election rally in the last six poll years and points to investor hopes of a stable and business-friendly government. There have been such hopes in every one of the last six election years, though.
The Sensex has risen ahead of every one of the last six general elections. In the month leading up to the 1991, 1996 and 1998 Lok Sabha polls, it rose marginally — by 1.5%, 1% and 1.5%, respectively — because of uncertainty over how the incoming government would handle the economy.
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But in 2004, when the market mistakenly expected the business-friendly NDA to return and again in 2009 when it anticipated that the UPA would retain power, the Sensex soared 7% and 28%, respectively, in the month leading up to the elections.
“The possibility of a Narendra Modi-led NDA government coming to power after the LS polls is fuelling the rally,” said Vinay Khattar, research head, Edelweiss Financial Services, a leading financial services company.
“Markets love stability. And whenever incoming governments have promised stability and growth-oriented policies, stock prices have risen,” said Devang Mehta, head of equity advisory services, Anand Rathi Securities.
Another senior analyst pointed to the 12% fall in the Sensex on May 15, 2004 when it became clear that the UPA would form the government with Left support.
“The markets got spooked because some Left leaders publicly spoke of reversing reforms and increasing tax rates. Sanity returned only after it became clear that PM Manmohan Singh wasn’t about to let his ‘outside allies’ swamp his reformist instincts,” the analyst said.
Typically, infrastructure, auto and banking stocks have done well in the run-up to most elections. “That’s because India is going through a sustained 20-year boom since the launch of economic reforms in 1991 and every government promised to increase spending on infrastructure. Rising prosperity led to high growth in the auto sector. Banks naturally also benefited,” said Chetan Mehta, executive director, CTM Capital Markets, a boutique investment firm.
Reliance Industries, considered a politically sensitive stock, has risen an average of 13.7% in the three months leading up to four of the last five general elections. L&T is another pre-election favourite, having risen substantially before each of the last six Lok Sabha polls.
On the economy and elections, a study titled “India: Election outcomes and economic performance” by Arvind Panagariya and Poonam Gupta makes for interesting reading.
The authors point out that over the last decade, economic growth has begun to play a near -decisive role in elections. They back this up with evidence: CSO data from 2000-04 and 2004-09 show that growth rates in Bihar zoomed from 4.5% to 12.4%, in Odisha from 4.8% to 10.2% and in Chhattisgarh from 6.1% to 9.7%. The electorate in all three states returned their incumbent governments to power.
In fact, their study shows that states with high growth rates return 85% of incumbent ruling party legislators; this figure drops to 50% in medium growth states; and two out of three legislators in low-growth states are booted out.
Read: Indices rally: How high is the high?
The stock markets are rallying in anticipation of a Modi-led government coming to power in May. Growth rates have been dipping over the last few quarters. Does this mean the election results are a foregone conclusion?
By no means! Markets have sometimes got their punts horribly wrong. Remember 2004?