Elections & markets: What to expect after 2024 polls | Analysis reveals surprising trends

[Music] we have seen extreme swings in markets during election years in 2004 when vaj LED NDA lost elections markets fell 20% within 2 Days in 2009 when Congress L UPA was reelected markets gained almost 18% within a day now J elections are considered an important event for the stock markets after all the government that comes to power decides the economic policies and these policies and reforms directly and indirectly impact the earnings of the companies and in turn stock prices so we decided to analyze how the country's general elections have impacted the stock markets in the past in this video we will look at two things one how elections impact markets in the short and medium term and two which sectors tend to do well in the election year there are some very surprising trends that we came across so do watch the video till the end but before we begin a quick reminder you're watching this video on ET money's English YouTube channel we also have a Hindi Channel vide and if you are or know someone who is interested in understanding the basics of Finance then we have a channel called 5 minute Finance the link is in the description okay let's first examine how markets behave during elections to analyze the relationship between markets and elections we we looked at the nifty50 performance before and after the election results for example let's look at the nifty50 returns before and after the results of the 2019 election in the 10 days preceding the result announcements the markets SED about 5% and 10 days after the results nifty50 was up 4% the trend was the same for the 2014 and 2009 elections we saw positive short-term returns before and after the elections in these three elections there were no surprises the election results were on the expected lines so if there is a trend during the past three elections should you make investments based on the post elction rally and what happens if the results are not as per the general expectations are markets going to be adversely impacted first let's talk about the surprise outcome of the elections in 2004 most people believed that the NDA would come back to power but it lost the elections and we saw correction in the short term into the runup to elections and after that but let's look deeper into the data and check what happened to the markets 3 to 6 months after the election results as I mentioned in the beginning markets fell 20% within 2 days of the result announcement however what's interesting as within 6 months the market stabilized and generated a positive return of 9% so the negative sentiments prevailing soon after the elections changed in the following 6 months now the markets mood didn't change because the new government announced some big bang reforms the correction that followed the election results made equities attractive to understand this better let's add the p ratio data of the nifty50 next to the returns before and after elections now the p ratio shows that markets were expensive before the elections the correction that happened around the election results made the nifty50 undervalued and so investors started buying equities leading to positive return 6 months later now 3 months before the election results the Nifty 50p was 21 the valuations were expensive as the historical me and P of the index was 16.6 now the day the results were announced the P was around 16 which made markets fairly valued but the p ratio fell as markets corrected post elections so 2 months after the election results the P was close to 13 this was quite a discount to the long-term median P making valuations attractive sentiments change in fact just 6 months after the elections markets were in line with their long-term valuations so when the results are not as expected there was a short-term volatility but soon the sentiments aligned with the fundamentals now let's answer the other question if the results are on the expected line do we necessarily see a positive momentum now analyzing the past two elections can answer this result in 2019 the Modi government came back with a thumping majority there was no surprises and the results were in line with expectations but we didn't see markets clock double digit returns in the short term soon after the elections that could be because the election outcome was on the expected lines and the positive sentiments were already factored in when the market generated an 8% return 3 months preceding the results let's look at the P data to see if this is true 6 months before and after the elections the Nifty 50p was in a close range it varied from 27 to 30 however the 5 and 10 year Medan p as of May 2019 stood at 23.2 7 and 21.59 respectively now after looking at the median P the valuation surrounding the election period definitely appears to be over hited so without an explosive growth in earnings it was unlikely for the market to see a massive rally if markets would have gone up quickly it would have resulted in froy valuations so 6 months after the elections the markets grew by a mega 2.21% in fact after the results the Nifty 50p began cooling down and it went from 29.02 to 27.3 1 in this second example we saw again that fundamentals matter more than the election outcome finally let's look at the 2014 elections while the results were on the expected lines we saw positive momentum in the market after the elections the three and six month returns after the elections were around 8% and 16% respectively we also saw about 19% returns 3 and 6 months before the elections now this looks like an ideal case for pre and post- elction rally but let's once again look at what valuations have to tell us the historical median p on 16 May 2014 was 18.96% later the markets were about 7% above their average Mion PE it was around 21 1.33 this was slightly expensive although the valuations were still not froy now all these three examples show us that events like elections really don't matter in the medium and long term but in the short term there can be massive swings Now we move to the next part of our analysis let's see which sectors have done well in the last four elections years but before we proceed we have been watching this video until now then I'm sure you finding it insightful we spent a lot of time researching and creating content that you can use to make better investing decisions so I would recommend you subscribe to our Channel and press the Bell icon so you don't miss any video from [Music] us to find out which sectors delivered the highest returns during the election periods we looked at the top five sectors in each election year we looked at the data for 2009 2014 and 2019 now during 2014 there were only a handful Industries tracking different sectors in the past three elections the financial Services sector was a top performer apart from this there was no other sector that did well in all three election years so next we looked at the top performing sectors in any two election periods the Nifty banking index did well in 2014 and 2019 the auto index was among the top performers in 2009 and 2014 next let's see how these three sectors performed in the last year and this year so far in 2023 the financial services sector underperformed the nifty50 index and this year too it has been underperforming so far the same is the case for banks when we say Banks we would like to focus more on private Banks because they have been underperforming lately so if you would like to invest in stocks that have not moved up significantly and may be available at decent valuations you can keep an eye on these two sectors on the contrary if you like to invest in stocks that are currently in momentum you can look at Auto and PSU Banks now Nifty Auto generated 47% returns in 2023 and this year too it has generated a return of 16.21% similarly PSU banks have been generating good returns however examine the fundamentals of these sectors before making any investment decision recently we did an in-depth analysis of PSU stocks and why they Rising if you haven't watched that video then I would recommend you watch it I attached the link to that video in the description box below finally let's look at some key things that you must keep in mind when it comes to your investment strategy during elections [Music] in the previous section we already saw that in the short term Market sentiments can drive the markets away from the fundamentals but in the long run it reverts back to its fundamentals so this year to you can use valuations as a compass to decide your investment move and use this volatility to your advantage for example as of 22nd April 2024 the p ratio of nifty50 is 22.8 to it's 5 and 10 year median P stands at 23.62 and 23.53 respectively So currently the nifty50 doesn't appear to be overvalued or undervalued if the positive Market sentiments Drive of the valuations you can consider rebalancing your portfolio which will help you book profits on the other hand if the Market's correct and the valuations are attractive you can consider investing more in equities now the companies have already started releasing their Q for results you can also keep a close eye on the earnings as they'll decide the course of the markets more than elections apart from the valuations there is another metric that gains importance with the election results around the corner and it's volatility and to see volatility we refer to the India Wix historical data now if you don't know what India Wix is let me give you a quick introduction India Wix is an index just like nifty50 it is constructed to measure the volatility of the Indian market so it shows the expected Market volatility over the next 30 calendar days the higher the India VIX Index the higher the expected volatility and vice versa now the index was formed in July 2010 you can see a graph on your screen since then and as you can see there are periods when the graph spikes these Peaks depict increased volatility for example around covid-19 the India Vick went beyond 75 the markets experienced the highest volatility ever around that time now historically the indexes average around 18.04 as of 19th April it stood close to 13.4 now whenever there are events that can affect the economy and the business then the volatility tends to rise in the past we have seen increase volatility during the election results for example on 15 May 2014 the Indian Wick stood at 36.7 6 while on 22nd May 2019 it was 2763 now markets usually remain volatile around election results going by the past TR the same could happen this time so be prepared and don't be surprised if you see some big swings as we approach the election result announcement however don't let the swings tempt you in making any rash decisions if you are a long-term investor you have a system to buy and sell stocks stick to it and focus on the market fundamentals now before I end this video I would like to share some data around sips for mutual fund investors now if you have an ongoing sip or planning to invest in a new fund don't be concerned about the market we looked at the data to see how sips have performed historically during election periods for this we compare two data points first we looked at a 10year sip that was was started 2 years before the election year second we looked at returns of the Sip that was started in the election month for all such sips the returns are between 11 and 16% so if already have an sip running or are planning to start one don't be afraid of the impact elections may have on your Investments if you have a long-term Horizon then events like elections don't matter and with this we have come to the end of this video we hope you like the video and found the answers to most of your questions if you did then don't forget to like the video and drop in the comment box what would you like us to cover next I'll see you next time till then take care mutual fund Investments are subject to Market risks read all scheme related documents carefully

Channel: ET Money

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Keywords: Election Risk or Return Opportunity, impact of election on stock market, Elections and Markets, Top Performing Sectors During Election Period, Investment Strategies Amid Election Volatility, growth stocks to buy before the election, How elections affect the stock market, stocks to buy before election, effect of elections on stock market dynamics, stocks to buy before election 2024, Election-driven fluctuations in the stock market, how the 2020 election will impact the stock market

Id: PK73Sv5GGaA

Length: 12min 41sec (761 seconds)

Published: Sun Apr 28 2024