The Hazards Of Betting On Political Developments

As the financial media creates a buzz about positioning your portfolio in anticipation of election results,here’s some history to recollect:

In May 2004, the Indian stock market shut on panic that a coalition government supported by the Left will ruin India with little economic reforms. On May 17, the Sensex fell 11% when everyone rushed to the exit door. What followed in the next three-and-a-half years, in the run-up to the global credit crisis of 2008, was that Indian stocks had their best run. Between May 2004 and December 2007, it returned 321%. To be sure, there wasn’t much economic reforms under Prime Minister Manmohan Singh during the period to write home about, but still the markets rallied as did most other asset classes across the world.

In May 2009, the Sensex rose to limit and was again shut, because everyone was scrambling to get their toe into the most exciting reform bus that Manmohan Singh was set to drive. Between then and now, it is up 17%, a far cry from the performance when fear engulfed about political outcomes. It is a fact that the Singh’s reform bus hardly departed from the station.

Facts show that market returns are unrelated to what investors believe to be the political outcome. Factors beyond political leaders have influenced returns. With nothing much to look forward to in the corporate world, or economic policy making, investors and financial advisers are spending time on guessing, on what the next general election could throw up.