Election: An event with only short-term uncertainty

The Lok Sabha elections are ongoing. With four phases of voting done already, the last of the votes will be cast on May 19 and on May 23, we would know who will represent India on the global front. The question here is why are elections so important for the markets. Will the elections be considered as an ‘event’ by the market participants or will it have a larger impact?

A stable government provide better scope for India Inc to growth. The lack of decision-making ability of a weak government, on the other hand, can dent investors sentiments, as it slows the process of economic growth as a whole. Let’s take the example of infrastructure development, large development projects can be initiated at a much faster pace by a strong government as compared to a coalition government. Hence elections are an important trigger for the markets as they decide the prospective growth trajectory and sustainability of investments for any economy.

But, will only election results decide the long-term track of the stock markets or will it have an immediate effect like what the markets experienced with events such as Brexit and US elections. If on May 23, we get a hung assembly with no major party bagging a strong mandate, this situation may have a knee-jerk reaction from the market. But on a long term basis, money flow will decide the direction for the markets. Strong cash inflows in recent past from FIIs and DIIs can be expected to continue due to the fundamental strength of the Indian economy. For the long run, election results will be a non-event.

FMCG companies such as HUL, Marico, ITC might run up if a single party gains Indian voters' mandate as consumption theme plays a key trigger here. While an unexpected outcome such as hung assembly may have a short-term negative impact on infra, real estate along with the auto sector.