The market focus is slowly shifting its focus to the elections season in the country as assembly elections are underway and the outcome of that could set the stage for the general elections early 2019. Already the market is factoring in the outcome of the elections as the prospects for the ruling BJP appear to be on the decline in Chhattisgarh, Madhya Pradesh and Rajasthan where the BJP is the incumbent party.

A 3-0 or 2-1 (any combination) score for the BJP in the state elections will boost the market’s confidence about the current BJP-led government forming the next government post the 2019 general elections in April-May 2019. But a setback will be disastrous for the equity market which is reeling under major volatile trades over worrying macro economic factors.

The market has tanked over the past two trading sessions as investors are slowly factoring in the outcome of the state elections. Opinion polls suggest BJP defeat in Rajasthan and a very tough fight in Madhya Pradesh and Chhattisgarh; Telangana also does not seem to be a cakewalk for TRS post the Congress-TDP alliance. And the prospects for a resurgence of the Congress in these states are growing which could be decisive for the 2019 general elections.

According to experts, political realignments are likely to happen at a fast pace in the coming few months. The 4:1 victory of Congress and JD(S) in Karnataka recent by-polls has emboldened the opposition initiatives to stitch a working alliance for the 2019 Lok Sabha elections.

Election data suggests that investors rarely lose money investing Pre-Elections. Across seven elections in the last 27 years, whenever an investor entered the market six months before the general elections and held on for two years, the investor made on average annualised returns of 23 per cent, with most money made in the 2009 elections when the UPA government held fort. While the least return has been a positive 1.5 per cent in 1999 (when the incumbent party i.e. BJP won), this strongly implies that the 27-year track record has never yielded principal erosion when entering pre-elections.

“While CY17 was a secular bull-run for equities, YTDCY18 has proved to be starkly different with sentiment nowhere near the euphoria of the last year. Arguably, valuations, global liquidity, trade conflict, rising interest rates and crude oil can be attributed as root causes. However, while post facto analysis and attribution is important, pre-emption i.e. rationally building a case for the future is equally if not more critical, Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management said in a report.

Net-net, irrespective of the incumbent government remaining in power or a change at the centre, markets have shown resilience in the periods encompassing general elections over the past 27 years, the report further said.

“While India benefited from a trinity of lower CAD, inflation and interest rates in the previous three years, these were amongst the best prints in recent times. In 2018, CAD was at 2.4 per cent in Q1FY19 and averaged 1.6 per cent in the previous six quarters. However, in Q3FY13, 6.8 per cent of GDP and averaged 4.3 per cent in the previous six quarters. Oil prices were high but stable in 2013 and are rising from lows in 2018. Interest rates were high in 2013 and are not very far from levels in 2018. Inflation, however, was much higher in 2013 and is relatively benign in 2018. Hence the current macro scenario is normalising for India, while markets continued gaining momentum earlier this year on the presumption of stable macros,” Sanctum Wealth Management report said.

On valuations, Indian equities still trade at nearly 11-13 per cent premiums vs. 10-year history. However they have currently fallen nearly –12 per cent from recent highs seen in the last couple of months. For the long run, equity markets turn out to be resilient wealth generators and given general elections are about 6-7 months away, the case for investing in these uncertain times becomes a bit clearer if we take past election period performance into consideration, it further said.