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The Election Effect

The general elections seem to have a positive effect on the markets. But should that affect the way we invest?

As you read this, our proud country's biggest festival will be underway. No, it's not the IPL that we are talking about, but the general elections. With one-fifth of the world's population voting, the elections will have more than its fair share of action, emotion and drama. Often referred to as 'The Great Indian Circus', the general elections have been a festival worth watching, following and participating in. But this time around, the elections are being looked forward to like never before, and for myriad reasons.

The Affected Verticals
In its February 28, 2009 issue, Business Line carried an interesting piece titled 'General elections spending could prove stimulus to economy'. The important part of this article was how the previous elections have boosted the country's economy, like in 1999, when the election was held in October, the sale of utility vehicles in September came to 9,788 units, up from 8,098 units in August. This leaves the impression that the increase in sales of vehicles in the last two months of 2009 could have been on account of the preparation for the upcoming elections in April.

One of the most quoted reports in the media is the Edelweiss Securities' 'Indian Election Watch', which states, “Sale of alcohol shoots up during elections. With increase in money supply, especially in rural areas, demands for personal care products are also likely to go up.”

Across the analysts' community, it is generally accepted that the short-term outlook is good for businesses like liquor, auto and FMCG because of the elections. But these reasons don't support the sustained growth in the long-term.

Impact on Stock Markets
On March 19, 2009, the Economic Times had published a feature which has caught the fancy of many people. A study in this feature shows that contrary to the general perception, elections often had a positive effect on the markets and to some extent, on the economy in general as well.

It is said that based on the data of the last eight elections since 1980, the stock markets tend to gain in the run-up to the Lok Sabha elections. The Sensex shows an average of four per cent gains in the three months preceding the elections.

The New Euphoria
Along with FMCG and motor company stocks, media stocks are expected to rise as well, on the back to increasing TRPs as well as added revenues.

Citi Investment Research expects as much as $160 million to be spent on advertisements ahead of the parliamentary elections - twice the spending during the last elections in 2004. It is also expected that half of that could go to newspapers.

But this good news is also momentary. Citi's analysts say 14 years of advertising data show no meaningful correlation between election spending and advertising market growth. It's the economic environment that matters.

As far as investors are concerned, since these are not ordinary times, one should avoid buying on pretentious euphoria. Like always, investors should look at the fundamentals of a business before getting into it. The current surge in the market could have been because of the election euphoria but let us not forget that stock markets all over the world have seen a surge after the announcement of the financial packages.

The BSE FMCG sectoral index too fell in March (-0.34). And no clear pattern has emerged among media companies either. In a nutshell, when it comes to the elections, exercise your voting rights and when it comes to investing, just follow the time-tested principles.

· Except the May 2004 elections, the Sensex has gained more than five per cent in the three months preceding the elections in the last five times since 1980.
· The only time when Sensex performance was in the red was in 1989 when the Sensex fell two per cent in the three months.

There have been only three occasions (in 1989, 1996 and 1999) when the market has delivered negative returns even in the one month before elections kick off.