What should retail investor’s do after Lok Sabha Election Results on 4th June?
We all are eagerly waiting for election results on 4th June and thinking about what will happen to our investments in equity market post-election results & how to remain prepared for the possible outcomes? Let us first see what happened with equity markets in last four Lok Sabha elections results in one year from the election results.
* The above data indicates that markets have traditionally shown positive trajectory in a year post election results. In 2004, there was a change in regime yet the market was positive. In 2019, market was negative by 21% because of COVID-19 pandemic.
What can happen this time Post-Election Results on 4th June? Additionally, how can investors prepare for potential outcomes?
My first and standard advice is to stick to your asset allocation. Let us see what are the three possible scenarios post-election results on 4th June & what should be your response to all of them as an investor.
1. Scenario -1 – If the market goes up significantly:
If the current Central Government secures a victory in the elections with a higher number of seats than expected, the market may experience a surge of 7% to 10%, prompting a shift in your portfolio’s asset allocation towards equities. The increase in market value will elevate the equity portion of your portfolio, resulting in a heavier weighting towards equities. For instance, if you maintain a 70:30 (equity to debt) asset allocation, it could shift to between 74.9% and 77% in equities. To realign your portfolio, you can rebalance back to the target allocation of 70:30, thereby decreasing the equity allocation and increasing the debt allocation.
2.Scenario -2 – If the market goes down significantly:
In the scenario where the current Central government loses the elections or wins with lower number of seats than expected, it may result in a market decline of 7% to 10%, prompting a shift in your asset allocation towards debt due to the decrease in equity value. This would lead to fall in allocation of equities in your portfolio. To rebalance, you would sell some debt and buy equities to restore the asset allocation back to 70:30 (equities to debt).
Scenario -3. If Market Remains Range Bound:
If the current Central Government secures a victory with a margin of seats within a range, and the market may remain within a range of ±3% to 4%, there is no immediate need to rebalance your portfolio. In such a scenario, the market fluctuations are not significant enough to warrant changes in asset allocation. You can maintain your allocation without adjustments.
Conclusion:
To conclude, an analysis of the last four Lok Sabha election results and subsequent market behaviour over the following year clearly indicates that election outcomes can have a short-term impact on the market. However, in the long term, the market’s performance is driven by India’s consumption story, which remains robust regardless of which government is in power. For instance, despite changes in government in both 2004 and 2014, the markets experienced significant gains in the following year.
Therefore, it is advisable to maintain and follow your asset allocation strategy judiciously and make necessary adjustments as discussed in the scenarios above.