Do Political Changes Affect the Share Market?

Political changes do not affect the stock market itself, but the actions of the traders affect the stock market.  The actions of the traders may be influenced by what they have seen or heard about political changes happening or said to be happening in the country.  Short-term fluctuations due to trader uncertainty and confusion may occur, but usually are quickly ridden out, and the market settles itself again.

It is important for long-term investors to concentrate on their long-term goals and not get tied up with worrying about short-term fluctuations.  India is a democratic country and elections will keep happening every five years at the least, so we cannot shy away from stock market trading simply because of this unavoidable recurrence.  In fact statistics show that despite some surprising outcomes, the last six elections in India have had little effect for those who invest in stock market. 

Looking back into the history of the tenures of Indian governments, some which collapsed within days or months, the figures speak for themselves and demonstrate that the stock market almost carried on regardless of the political landscape.

During the 1989-90 tenure of V. P. Singh, the Sensex actually shot up by 73% in only 11 months.  And this was under the regime of a Socialist Prime Minister who is known to have given his acceptance to the recommendations of the Mandal Commission.  This is a clear warning that anyone considering investment in share market should not fall for the labels that the media attach to Prime Ministerial candidates such as ‘business-friendly’, ‘reformer’, ‘socialist’ etc.  History has proven these to be nothing but red-herrings.

Take for example the 1991 election which resulted in a minority Congress government headed by P. V. Narasimha Rao plus coalition members.  This leadership group was labelled as being ‘anti-market forces’.  However, if one was to compare the market returns during this regime to the market returns under the Rajiv Gandhi-led regime of 1984-89 (Gandhi having been elected with a strong majority), it becomes apparent that returns of over 20% occurred in both instances.  This example goes to prove that whether or not a minority or a majority government happens to be in power, it does not seem to adversely impact on the market.  This is counter to most people’s assumptions that a minority government would be bad for traders.

Historians and commentators have noted that despite political parties and leaders having fierce rivalries driven by strong political ideologies, their stance on business does not differ greatly in real terms.  Under the rulings of successive governments, the journey of the stock markets in India has been calmly taking the same course.  It has not been often that the decisions of one leader in regards to finance and business matters have been outright reversed by a successive government.  All governments appear to be heading in the same direction when it comes to developing India’s economy.  Their political ideologies do not tend to interfere with this, so other than micro-fluctuations, the long term view does not change to any great extent. 

The important point to keep in mind is that regardless of all the turmoil that Independent India has witnessed, (foreign currency crises, threat of war, conflict over Kashmir, collapse of governments to name a few example causes), the markets have still never generated negative returns, and that is a fact.

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