Empirical evidence suggests that the ballot box is an imperfect gauge to measure market sentiment. In a pre-election year, much is made of the market’s fear of not having a stable government at the Centre. Coalition governments are portrayed as being unstable and prone to taking populist decisions, often to the detriment of the economy.
However, fears of a market meltdown triggered by an indecisive political outcome, are unwarranted. The stock market had its best bull run since the turn of the century during the tenure of UPA-I, the coalition government which came to power after the general elections of 2004 threw up a fragmented house.
Despite the UPA’s second term being marred by allegations of corruption and policy paralysis, the Nifty doubled during the period. In contrast, the Nifty rose by around 50 percent in the four years of the NDA government, which was voted to power with one of the biggest majorities in recent years.
This indicates that it is a misconception to link electoral results with stock market returns. Long-term investors should not read much into Street myths surrounding the movement of the index in the immediate aftermath of a political verdict.
In this episode of Stock Market Classroom, Udayan Mukherjee, Consulting Editor, CNBC TV18, talks of how market participants can configure their portfolios to optimise returns, irrespective of which way the political pendulum swings.