Credit Suisse Wants To Debunk The Theory Of Elections Inducing Market Volatility

Credit Suisse is out to debunk the theory that Indian markets turn volatile ahead of elections.

The Indian stock markets have wiped off more than $100 billion of investor wealth this year over uncertainties, including those linked to the upcoming general election, according to Bloomberg data. But Credit Suisse doesn’t see a connection between the two. The elections have had no lasting impact on market performance, despite them throwing up surprises, according to a report by the investment bank.

When the Congress-led United Progressive Alliance emerged the surprise winner in 2004, the S&P BSE Sensex tumbled nearly 6 percent on the result day and around 11.14 percent the day after.

“The fall before the 2004 verdict was due to fears of the economy slowing—a concern that we face currently,” according to Credit Suisse’s ‘Votes & Quotes’ report. In all but one of the six elections since 1996, market returns in the three months to election results were positive, it said.

Despite the heightened volatility around election, nervousness rose substantially only in 2004 and 2009, the report said. Four of the last six elections didn’t witness a meaningful rise in volatility around election results, it said.

The spike in 2009 was a continuation of heightened volatility around the financial crisis that the world was engulfed in after the 2008 collapse of Lehman Brothers, the report said, adding that it didn’t presage a change in direction for the market.

Credit Suisse’s India Equity Strategist Neelkanth Mishra had stressed on it in a December interview with BloombergQuint, saying one shouldn’t “overemphasise” the impact of election on the market. “Even the elections in May won’t have an impact on a short-term investment of six to 12 months. The only impact would be on a long-term basis when we consider the policy changes.”

Indian political parties’ ideologies are generally social, and not economic. In addition to this, the central government has whittled down its economic presence in the last 30 years, with most major reforms needed at the state level, the report said.

Sectors Unaffected

The report finds that most sectors in each election gave positive returns in the 81 days that preceded the results. This is because most of the revenue generated by companies in the mainstream indices is not India-linked, it said.

The information technology sector, specifically, has never faced the the brunt of election results and it even surged during the dot-com crisis at the turn of the millennium.

Other export-driven sectors like metal, refiners, export revenues of automakers and auto ancillaries and pharmaceutical exports aren’t likely to be affected by a change in government, at least not over a few years, according to the report.

• The energy sector comprising companies like Reliance Industries Ltd. and state-run oil firms has seen a steady uptick uninterrupted by elections in 2004, 2009 and 2014.
• The pharmaceutical sector has company-specific drivers while industrial stocks are affected by investment cycles, thus remaining majorly indifferent to elections.
• Utilities and telecom stocks continue to remain the least volatile.

The steady market share gains of private-sector banks that allows them to sustain a 20-percent growth is likely to remain unchanged irrespective of the government in power.