16th May, Election Results Day: How to Prepare Your Investment Strategy Pre and Post Election Results?

Right now our country is passing through 16th Lok-Sabha elections, which has  started since 7^th of April 2014 and will end on 12^th of May 2014 and the results will be declared on 16^th May, 2014 that is next  Friday.  Incidentally, this is also summer vacation time so everyone is in vacation mood.  A lot of effort has been put this time to encourage people to vote. Fortunately, this time the voters are much aware of their voting rights and therefore the voting percentage has gone up at most of the places. Now everyone is waiting for 16^th May 2014, the day on which results will be announced.  However, it seems that investors are not prepared for short term volatility that can arise in the equity markets due to election results. This article is an effort to give you some insights on what should you do before and after election results?

Before we work out some strategy, let us go through what happened at the time of 2004 and 2009 Lok Sabha election results.

What happened at the time of 2004 Lok-Sabha Election Results?

In 2004, Lok-Sabha Elections overall expectations were in favor of NDA getting majority again and coming to power. But when results were declared on 13^th May 2004, NDA had lost and by 17^th May 2004 it was clear that Congress will form new Govt. along with its alliance parties.

As per the above  chart, on 10^th of May 2004 just before election results, BSE Sensex closed at 5555. On 17^th May 2004, immediately after the results were declared and it was clear that Congress will form new Govt. in Centre along with its alliance parties, BSE Sensex dropped by around 1300 points that is around 24% in just a period of 7 days. On 17^th May itself BSE Sensex saw a fall of 11.14% (564.71 points), which was the second biggest fall in the history till that time, circuit filters were used twice. This happened because of disappointment in investor community. But by 11^th Nov 2004, within 6 months from the date of election results BSE Sensex crossed 6000. It means it went up by around 42% just in a span of 6 months. Therefore, post result fall was actually an opportunity to invest and make good returns but most of the investors missed it.

 When markets dropped by 24% the economic activity in the country or corporate profits had not fallen by 24%. It was just impact of short term sentiments which was washed away within six months. Therefore, ideally investors should not get carried away with short term sentiments.

What happened at the time of 2009 Lok-Sabha Election Results?

In 2009, India along with the whole world was passing though financial crisis and during that time Satyam scandal came into picture. Satyam raised lot of questions on Governance and compliance aspects of Indian corporate sectors. Confidence of Investors in Indian markets became very poor.  Once again UPA (congress and its alliance parties) got majority seats and came into power.

 As shown in above chart on 8^th May 2009, BSE Sensex closed at 11876, results were declared on 16^th May 2009 and on 18^th May market went up by 17.34% in a single day and touched 14284. Upper circuit breakers were applied on this day. So within 11 days market went up by around 20%. By November 2009, within six months from the date of election results BSE Sensex crossed 17000. This happened as previously the market was in oversold condition. But later, from 2009 to 2013 end BSE Sensex more or less remained between the ranges of 17000 to 20000.

Earlier in 2009 when Satyam Scandal came into picture and market had fallen sharply, economic activity or corporate profits had not fallen but short term sentiments were negative.  Therefore, when short term sentiments improved markets improved rapidly.

In 2004 and 2009, we saw extreme volatility on the day of election results and thereafter. Both the times UPA came in to majority but immediate reactions of Equity markets were totally opposite.

 Whenever these types of events are close investors try to predict what will happen and try to position themselves according to their predictions. But, when the situation moves against their predictions and expectations, they are not prepared for it and generally lose good opportunities. This should not happen with you this time and therefore I would like to suggest everyone to be prepared for different scenarios with neutral mindset and not to be biased on a particular scenario. 

What scenarios are possible in 2014? Let us see……

Scenario 1. NDA (BJP and Alliance) comes with very good numbers: Most of the investors are expecting this scenario and that is why over last few months equity markets have moved up by around 15% with very positive sentiments. If this happens, then there are very high chances that on the day of election results or immediately thereafter markets may move up by 10% to 20%.

In this situation investors should ideally book some profits from their equity investments for simple reason that over last six months markets have already moved up by around 15% and further rise of 10% to 20% will stretch the valuation.  But economic activity or profitability of Indian companies have not gone up by this much percentage. It is effect of positive sentiments only. Investors who are following strategic asset allocation should stick to their asset allocation and rebalance their portfolio accordingly.

Scenario 2. NDA (BJP and Alliance) gets moderate number and has to find more support: In this scenario there will be”jod tod ki rajniti” , where NDA has to find more support from regional parties. Equity markets can remain confused and volatile until the final tally of alliance comes out. Here markets may not move much up or down. Therefore, my advice to investors would be to hold their situation until some major activity takes place. Those who follow strategic asset allocation should stick to it.

Scenario 3. Third front comes up with good numbers: Chances of this to happen are less but still we should be prepared for this scenario. In this case UPA(congress and alliance parties) and NDA (BJP and alliance) both comes with poor numbers and regional parties like SP, BSP, Trinamool Congress etc. come together to form Govt. Now this will disappoint the markets and in this situation markets can fall by 15% to 25% on results day or thereafter. This can create opportunity for investors to buy good company stocks or good equity mutual funds at cheaper rate. But for this investors should be prepared with some liquidity in their portfolio and they should invest only after significant fall of minimum 10% to 15%. Investors should always remember that when market falls by such heavy margins, in reality economic activity or corporate profits do not fall so sharply but it is just sentimental effect. Those who follow asset allocation should rebalance their portfolio. 

Scenario 4. UPA (Congress and Alliance) comes with majority: Although, this Scenario looks most unlikely we should not ignore it completely. Instead, we should be prepared for it. In this scenario also markets can fall by 10% to 20%. Now here investors should invest in good company stocks or good equity mutual funds. 

Conclusion: Investors should not try to predict markets or remain biased on any one of above scenarios. Predicting markets is impossible therefore I would recommend that investors should be prepared for all above scenarios with neutral mindset.  If markets fall beyond 15% they should invest in good company stocks or Equity mutual funds as per their asset allocation and if markets go up beyond 15% they should book some profits from equity and move to safer asset classes like bonds.

Investors need to understand one fundamental principle that whenever due to any such event markets go up heavily or come down heavily, economic activity in the country or profits of Indian companies have not moved up or gone down so sharply. It is just impact of short term sentiments in the markets so investors should try to react to it logically, rationally and not emotionally.