Elections, GDP Growth & Returns

Published On: 27-Dec-2018

As we head into 2019 the question I am asked most often is “What is my view of the elections and how it will impact the market”.

To this, my preferred answer is: ‘I don’t know’.

My next best answer is that it will have an impact, in the short run, but it’s rather hard to figure out what it will be.

Then I reach for history because it is available and it is always instructive to see what history says.

The chart below plots the GDP data for China as per World Bank in USD (1), the GDP data for India as per World Bank in USD (2). The Shanghai Composite Index in USD (3) and S&P BSE 200 Index in USD (4) are also plotted in the chart. This for the 16 year period from Dec 2001 to Dec 2017.

Elections, GDP Growth & Returns

Source: Bloomberg

We know that during this period India has faced 3 general elections- 2004, 2009, 2014 and China does not really have multi-party system. During this period China’s Nominal GDP grew 14.82% p.a. in USD terms. India’s Nominal GDP grew at a slower pace than China at 11.14% p.a. in USD terms. Certainly, we should aspire to grow faster than we are currently growing. But, note that this faster GDP growth and lack of elections has not converted into better stock market returns in China. India equity returns as denoted by the S&P BSE 200 Index have out-performed China’s equities by a wide margin (both in USD).

I can only hope that this provides food for thought, for those who believe that election outcomes determine long run market outcomes. This should also give pause to the camp that believes that the uncertain outcome of elections converts into poorer market returns. Further, those who firmly believe that GDP growth is the sole factor that drives equity returns might also want to rethink their arguments. It’s a lot more complex than that. China has the better growth, an apparently stable political system and government but not the better stock market returns. India may have lagged on GDP growth and may have the specter of uncertainty brought about by constant electioneering and yet India has the better returns.

Those that worry about constant electioneering may also want to spend a moment thinking about the election cycle in the US. The US President is elected for a four year term but the US House of Representatives (Congress) has only a 2 year term and hence this is a 2 year election cycle. That recent election in the US was the mid-term and the next round will coincide with the Presidential cycle in 2020. Further, the US Senate witness elections every 2 years with 1/3 of the seats coming up for elections in each cycle with the Senators having a 6 year term. The election dates are co-incident with the Presidential-cycle and mid-term elections. As regards state elections – the governors have a 4 year term, but only 36 of the states run a common election cycle-coinciding with the mid-terms, but not the Presidential-cycle. The other 14 states have a different cycle. State legislature elections in about 45 - 46 states coincide with the mid-term elections. In other words, there is a lot of electioneering with a cycle of about 2 years.     

Of course, there is volatility associated with elections. Emotions run high during elections and some of that spills into the markets. But, the data and history say it loud and clear. Elections and GDP growth are not the sole determinants of long term equity returns.


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Author Bio

Vetri Subramaniam
Vetri Subramaniam is Group President & Head of Equity at UTI Asset Management Company Ltd. He has been in this role since January 2017. UTI MF manages assets of Rs. 1,717 bn* and the total assets under management of UTI are Rs. 10,981 bn*. At UTI MF Vetri leads a team of 19 persons including analysts and fund managers. The total equity assets managed and advised by the team are Rs. 1,077 bn*. Vetri has over 26 years of work experience. Prior to joining UTI in January 2017 he was Chief Investment Officer at Invesco Asset Management Ltd. He was part of the start-up team at Invesco (then Religare Asset Management) in 2008 and helped establish the firm¬タルs proprietary investment process and the team. During this period the firm established a strong track record. The firm also launched several offshore funds investing into India from Japan, Mauritius & Luxembourg. Vetri started his career at Kotak Mahindra in 1992 after passing out from IIM Bangalore with a PG Diploma in Management. His experience in equity markets & investment roles at various firms from 1994 includes Kotak Mahindra, SSKI & Motilal Oswal. He was also one of the founders of Sharekhan.com (now Sharekhan BNP Paribas) where he led the research & content team. He has also worked as an advisor to a UK Hedge fund Boyer Allan on its equity investments in India during 2003-2007. He is a frequent contributor to the media and regularly speaks on equities and investing at various forums - including the media & educational institutions. *The Month end AUM figures are as of December 31, 2020.