Elections, Returns & Sustainable Wealth Creation

Published On: 22-Jan-2019

Post the results of the three state elections the most common topic of discussion these days seems to be the outcome of the central elections in May month of this year and its consequences on the markets. The markets would certainly watch out for the political developments in the run up to the elections viz. coalition partners being won and alliances being formed by the NDA or the UPA, progress on Mahagathbandhan, opinion poll results, policies by the government to alleviate rural and SME stress etc. All this could lead to a lot of noise and consequently volatility in the markets over the next few months. However, for the long term investors wanting to generate wealth it would be advisable to shut his or her eyes and ears and control the urge to act.

While markets like to lay a lot of emphasis on who would form the next government and whether it would be a strong government or a weak coalition but data suggests that apart from the initial knee jerk reaction there is hardly any positive correlation between the strength of the government and the stock market returns over the tenure of that government. And there is a fundamental reason for this behaviour. As they say markets are a voting machine in the short term but are a weighing machine in the long run. Post the election outcomesmarkets tend to cheer a strong government as they feel that policy making would be swifter and unencumbered and this leads to a re-rating of the P/E. Conversely a weak government formed out of a rag tag coalition gets a thumbs down as it is perceived that policy making has to go through a lot of back and forth leading to a sharp de-rating of the markets. While this can determine the short term returns but in the long term the sustainable returns in the markets are driven by the underlying corporate earnings growth and that is why the table shown below may surprise many investors. The first table shows all the governments that completed a full term since opening up of the economy in 1991 and the corresponding market returns during their tenure. The second table shows the two governments that could not complete their full terms.

 

Table 1:

Prime Minister

Term

Govt. Strength

S&P BSE 100 Return

Mr. P V Narasimha Rao

June 1991– May 1996

Weak Coalition

162.60%

Mr. A B Vajpayee

Oct 1999 – May 2004

Strong Coalition

24.60%

Mr. Manmohan Singh

May 2004 – May 2009

Weak Coalition

131.80%

Mr. Manmohan Singh

May 2009 – May 2014

Strong Coalition

101.30%

Mr. Narendra Modi

May 2014 – Till Date

Absolute Majority

53.90%*

*As on 31st Dec, 2018

Table 2:

Prime Minister

Term

Govt. Strength

S&P BSE 100 Return

Mr. Deve Gowda &
Mr. I K Gujral

June 1996 – Mar 1998

Weak Coalition

-5.4%

Mr. A B Vajpayee

Mar 1998- Oct 1999

Weak Coalition

36.7%

Source: Bloomberg

 

It is worth mentioning that ever since the economy opened-up in 1991, successive governments have only carried forward the reforms process and there have not been any reversal of policies. This gives us the confidence that the Indian economy would remain one of the fastest growing economies in the world regardless of who forms the government at the Centre in 2019. At UTI we like to keep our investment process simple yet driven by deep research and data, and avoid getting carried away by the ever changing narratives in the markets.

Disclaimer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

 

Author Bio

Ajay Tyagi
Mr Ajay Tyagi is Executive Vice President & Fund Manager – Equity at UTI AMC Ltd. He is a CFA Charter holder from The CFA Institute, USA and also holds a Masters degree in Finance from Delhi University. Ajay joined UTI in the year 2000 and has been working in the equity research and fund management functions since then. He is presently managing few domestic mutual fund schemes He is also acting as an Investment Advisor to a few India dedicated offshore funds. Prior to being designated as a Fund Manager he has worked as an Assistant Fund Manager in the Offshore Funds division.