Lok Sabha elections start next month. It can be quite easy for investors to get carried away in predicting a possible outcome, and its impact on capital markets. It is widely believed that election results, politics and market returns go hand-in-hand.
However, in the long run, it is only earnings growth that drives share market returns. There will definitely be more short-term volatility due to this mega event as observed historically, but on a long-term basis, it is nothing more than noise.
If we analyze past instances, BSE Sensex fell 11% on May 17, 2004, due to surprise defeat of incumbent NDA government; on May 19, 2009, never seen before event in the history of the Indian Capital market happened when Sensex jumped 17% due to thumping victory of UPA; and in May 2014 (when NDA formed a majority gov’t at Center) Sensex rallied 25% one year prior to NDA win.
However, a deeper look suggests that subsequent share market returns were a reversal from the immediate perception of the electoral outcome. After the single day fall in 2004, for the next 3 years, Sensex delivered a whopping 47 percent CAGR returns.
In 2009, similar move occurred but in opposite direction; after euphoric 17% single-day rise, for the next 3 years, Sensex delivered an underwhelming 4% CAGR returns.
Even after 2014 elections, Sensex subsequently delivered only 8 percent CAGR returns for next 3 years.
