10 June, 2019
The stock markets around the world are afraid of change, whenever there is a hint of change in the environment the markets seem to take it on a negative note rather than on a positive one.
Changes like budgets, government regulations, tariffs and the list is never ending, but one of the most prominent change that seems to affect the stock market or rather the sentiment of everyone in the stock market is the elections.
The forthcoming elections caused a sense of uncertainty in the stock market throughout the first quarter of this year, but after Narendra Modi’s actions following the Pulwama attack the voters seem to be tilted in the favor of our current prime minister.
One of the main factors affecting the current rally in the market is the sense amongst investors that the current government will be victorious in the upcoming elections. Not only the domestic investors but the foreign institutions that heavily affect the market seem to be fond of the Modi government and if Modi wins the elections we can expect an inflow of foreign investment in our markets.
If there is a change of power and Modi government fails to win the election there would be a major sense of uncertainty in the economic environment and stock markets do not seem to do well in a period of uncertainty. When investors and institutions don’t know what to expect they tend to favor holding cash rather than securities. If Modi government does not win this election, it would be highly probable that the stock markets take a negative turn for the short run.
Sentiment plays a big role in the markets, when favorable things happen according to investors their sentiment is positive and they have a bullish mindset whereas when things that come as a shock to investors or are unpredictable investors seem to gain a weak or a bearish sentiment, these sentiments guide the stock markets in the short run.
However, time and time again it has been proven that factors such as the elections and sentiments among other things only affect stock prices in the shorter run whereas the fundamentals are what should be considered for long term. Fundamental analysis is what leads to making sound long term investment decisions rather than trying to figure out these short term factors. Good quality stocks bought at great valuations will fetch you returns regardless of whether is BJP on top or Congress is on top.
Yes, Modi winning the elections might cause the market to go in a bull run but at the end stock prices will come to their fundamental valuations sooner or later. The more important thing to analyze from governmental environment is stuff like the regulations and policies the government is likely to impose. Stuff like subsidies and taxation is what affects the fundamentals of scripts and sectors. Tariffs and quotas are the factors that are likely to affect the bottom line of companies and investors should keep an eye out on announcements and changes by the government involving such topics actively.