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FII’s & Market performance around General Elections

, November 27, 2013, 1 Comments

India, the world’s largest democracy goes for general elections every 5 years. The next general election for the 16th Lok Sabha will be held before 31st May 2014, as the 15th Lok Sabha completes its term. The table below gives an overview of elections that are held in the last 5 years and the upcoming one in 2014. FIIs . Market,& General Elections India-MarketExpress

General Elections and Markets
Investors both retail and institutional tend to be optimistic around elections. A change in government benefits both the common man as well as the investor. Elections and Election results are closely monitored. Some of the main initiatives that investors look for a new government are major economic policies announcements, plans to attract investments, public expenditure, plans to control inflation & current account deficits, plans to stabilize currency. In this article, we try to look at how Foreign Institutional Investors (FIIs) invest before, during and after election periods. We also try to see how the over market has performed before, during and after election period. We study FIIs as they contribute significantly to the total market volumes and investments.

Nifty Performance 1 Year before the ElectionFIIs, Market, Nifty  & General Elections India - MarketExpress
Markets tend to be optimistic when elections are about to come. In 4 out of 5 instances, Nifty remained positive before the elections. In 2009, the performance before the elections was substantially weak, but this could be attributed to sub-prime crises of 2008. In general we can say that markets have remained positive for one year prior elections.

FII Investments in Equity 1 Year before Elections
Baring 2009, FII have also been optimistic before elections in all periods. The negative Investments in 2008 can be due to Sub-prime crises of 2008.

Both Market Returns and FII Investments seem to be hopeful for a change before elections reflecting positive Market Performance as well as Investments.

Returns from Nifty during the Election Period
Actual Election period was taken to calculate returns during the Election period. We find mixed performance during this period. In 1996 & 2004, Negative performance was seen during the election period. In both these years substantial run up was seen before elections. 1998, 1999 and 2009 markets were positive in spite of run up seen before elections. 2009, is again an exception due to subprime crises.

 

FII Investments in Equity during election months.
To check FII investments, cumulative investments for the entire month in which elections were taking place have been taken. We find that most of the time FIIs have been investing also during the Election month except in 1999. This was also first time a united front of parties managed to attain a majority and formed a government.FIIs, Market, Nifty  & General Elections India - MarketExpress

There seems to be no clear trend in terms of market performance during election period. However, looking at Investments we could infer that a single majority government increases confidence of FIIs who continue buying even during election months. In case of a coalition government we could expect some selling from them.

Returns from Nifty 1 Year after the Election
Markets like stable government, which is evident after looking at returns 1 year after elections. In the years of 1996 and 1998 we did not have a full term government. Market posted negative returns after elections in these years. In 1999, 2004 and 2009 we had a government for full term which market appreciated by posting positive returns after elections. 1999 returns year after elections were negative which could be attributed to bursting of the dot com bubble.

FII Investments in Equity 1 Year after Elections
FII Investments also tend to favor stability. We see the quantum of investments being substantial in years after elections of 1999, 2004 and 2009.

Both Markets and FIIs like stable governments which is reflected in positive Market Performance along with FII Investments

Conclusion
Investors tend to build up hope before elections lifting up markets as well and attracting more investments from FIIs. During Elections there is no clear trend. After Elections if there is a stable government it could attract more investments. If it’s a government with majority in the parliament then markets could go even higher aided by more FII Investments. However, if there is a coalition government, we could expect some selling just after results are announced.