Elections Don't Matter!

13 MARCH 2019

Yes, you read that right!

Elections don't matter for your investments in the long run.

Sure, election results matter - but only in the near term.

In 2004 when the BJP-led NDA coalition lost the elections in a shock result, the BSE-30 Index collapsed from 5,358 on May 12, 2004 to 4,961 on May 21, 2004, a loss of -7.4 % in 7 days.

When the UPA-2 was reelected by a wider-than-expected majority in the May, 2009 elections the stock markets surged by +17.2% in one day on May 18, 2009. Trading was halted three times that day as the market hit 3 upper-limit circuit breakers during that truncated trading day. There was less than 90 seconds of actual trading on that day!

On May 16, 2014 as the BJP's historic victory under Narendra Modi was being reported, the market surged to a strong opening and finally closed with a gain of +1.1%.

So, yes, election results can move markets but elections don't impact your portfolio over the long run.

Ignore the noise!

Analysis by Quantum Mutual Fund shows that talking about election results is a great conversation starter but elections have no impact on your long term investments!

The heat and dust which encompasses the campaigning season and then dies down is a reason for our conviction that elections do not matter to your investments. That is summarized by this powerful chart:

Chart1: India Continues to Grow...As It Has Over The Past 39 Years

There are many messages in the above chart:

  1. Irrespective of whether the government in power is a single party or a coalition, the rate of growth in the Indian economy has averaged 6.3% per annum since 1980, after removing the impact of inflation. If you added the impact of an approximate 6.5% increase in prices every year, then the economy has grown by nearly 13% every year for 39 years. If the output of all economic activity in India was 100 in 1980, it is about 11,000 today. If you remove the impact of price increases, then economic activity has grown from 100 to 1,100 - by 11x. (Note that inflation is a killer and not good for any economy!)
  2. During the past 39 years, we have had 10 governments and 3 of these 10 have been single party governments. During the reign of these single-party majority governments, the Indian economy has seen growth rates of:
    • 5.9% (see the orange bar) during the January 1980 to October 1984 rule of the Congress under Mrs. Indira Gandhi;
    • 5.4% during the November 1984 to December 1989 rule of the Congress under Rajiv Gandhi,
    • 5.2% during the July 1991 to May 1996 rule of the Congress government under Narasimha Rao.
  3. When the 7 coalitions were in power, the Indian economy grew by more than the growth rate achieved by the 3 single-party governments for 6 of the 7 coalition governments.
  4. All periods, barring the tumultuous period from December 1989 to June 1991 when India was ruled by 2 successive coalition governments led by V. P. Singh and Chandra Shekhar, saw coalition governments ensure that growth was higher than that under single party governments;
  5. One can argue that the Modi-led BJP government is a single-party government and not a coalition government: it fought the 2014 elections as a collation with many partners but, because the BJP won a majority of seats on its own, it did not need any of its pre-election partners to form the government. Indeed, none of its pre-election coalition partners has any seats in the Cabinet. So, while showing up as a "coalition" government, it is in fact a "single-party" government. The rate of growth in the economy under the Modi government is reported as 7.4% per annum. But this is based on a new series of data which is mired in controversy. There is no guidance from the government on how this new data compares with the older data series from 1980 to 2014. Most economists deduct 1.5% from this new data series to equate it to the data under the old series. This means that the economy has probably grown by 5.9% under the Modi regime. This is lower than the long term average of 6.3% - giving further "proof" that single-party governments deliver rates of growth that are sub-par and below the long term average!
  6. So, in the end, it seems that 4 out of 4 single-party governments delivered lower economic growth than the long term average of 6.3% per annum and 3 out of 6 coalitions delivered a higher rate of economic growth than the long term average of 6.3% per annum.
  7. One possible explanation for this higher growth rate under a coalition government could be that, when India is ruled by single-party governments, those governments have the power and the time to trouble us and come out with harmful policies. When there is a coalition, the governments are so busy fighting with each other over what Cabinet seats to allot to each coalition partner that they leave us alone and we grow faster!
  8. Hence, we suggest,
    • elections don't really matter, India's economy will grow;
    • having a coalition government is probably a better outcome than having a single-party government!
    • The rate of growth in the global economy (the blue bars) does not really impact what happens in India. This is because, although India is increasingly plugged in to the world in terms of the flow of goods, of people, and of money - the real story in India is the domestic consumption patterns. India is Bharat!

How higher GDP led to higher stock market returns!

So, while this is all about the rate of growth in the economy, what does the data on the stock markets and returns from being an investor in the BSE-30 Index tell us?

Well, the BSE-30 Index was 118 on January 1, 1980.

As of December 31, 2018 it was 36,068.

The BSE-30 Index has increased by 305x over that time period of 39 years

We noted above that the economy, over that similar time period, has grown from 100 in 1980 to about 11,000 today (adding in inflation which includes the impact of rising prices) - so an increase of 110x.

The returns of the BSE-30 Index are completely independent of which kind of government is in power! The highest returns from the BSE-30 Index are under coalition governments - and the lowest returns are also under coalition governments. But it is also true that under 3 of the 4 single party governments, the rate of return from an investment in the BSE-30 Index has grown more than the 39-year average of 19.3%.

Chart 2: Proof that Elections Do Not Really Matter while investing in Equities!

There is one simple message in the chart above.

The BSE-30 Index has grown a whopping 305 times over the last 39 odd years, creating wealth for those who wisely invest in the stock markets and remain invested for the long term - irrespective of the short term volatility that is the hallmark of any financial market.

What Changes at Quantum Mutual Fund if the Government Changes?

In one word: Nothing.

The equity team at Quantum and our equity fund managers firmly believe that India is a long term growth story and continue to pick stocks using the deliberate investment philosophy that we have built at Quantum - irrespective of who is in power.

We continue to seek the best companies to invest your savings in, so that you can build wealth and meet your financial goals with confidence.

But, in case you are still worried....

While nothing changes for us at Quantum, we do realize that these elections could be one of the most closely fought in recent times - and the election results may have an immediate impact on the stock markets.

For the next 3 months - all that we will talk about in India will be the elections.

(The Cricket World Cup starts on May 30th, 2019 - by which time we will have an election winner and can then focus on the important issue of whether India can win the World Cup final on July 14th!)

While getting caught up with the election frenzy and listening to multiple people, many of you will be worried about what will happen to your investments in equity mutual funds, in gold, and in liquid funds (a passive retail investor should NEVER buy a debt fund, in our opinion).

So, for those who wish to worry about something, we are offering you a simple solution to rejig your portfolio based on who you think will win the next elections:

  • Scenario 1 - If you believe that a BJP-led coalition will come to power;
  • Scenario 2 - If you believe that a Congress-led coalition will come to power;
  • Scenario 3 - If you believe that a Mahaghatbandan-led coalition will come to power;

Table1: The Simple Solution to Rejig your Portfolio:

Your Expected OutcomeEquitiesGoldLiquidGrand Total
Quantum Long Term Equity
Value Fund
Quantum Equity Fund of FundsTotal (Equities)Quantum Gold Savings FundQuantum Liquid Fund 
Option A:
BJP Led Coalition
Option B:
Congress Led Coalition
Option C:
3rd Front or Mahaghatbandhan

Given the past data and our analysis of the impact of elections and governments on the growth rate of the Indian economy, Quantum firmly believes that elections do not matter when it comes to investing in stock markets. However, if election results do worry you and you are wondering how to allocate your investments then we have a one click solution for that too. So go ahead and make your allocations based on your expected outcome, you can curl up in front of your favourite noisy TV channel and watch the election tamasha!

Yes, Quantum, I believe that the BJP-led coalition will win so let me buy your suggested basket of mutual funds in one easy click.

Yes, Quantum, I believe that the Congress-led coalition will win so let me buy your suggested basket of mutual funds in one easy click.

Yes, Quantum, I believe that the Mahaghatbandhan-led coalition will win so let me buy your suggested basket of mutual funds in one easy click.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Savings Fund Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF, 10% in Q ESG and 75% in QEFOF 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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3 Responses to "Elections Don't Matter!"


Mar 14, 2019

@Patriot, agree, I might be going overboard with believing the author is trying to build a narrative, but, I can't help noticing the subtle political messaging that this article is conveying. I am referring point 8b. Here are the problems I find with the data:
1) The single party governments were more or less before liberalisation
2) For calculating the average growth, the growth rate between 2014-18 is 7.4%. But then, in point No. 5, "most economists" deduct 1.5% from this new series (the average changes, but not by much). Now, if "most economists" agree to deduct 1%, then, that tells a much different story !
So, the point I would like to make is, the data is just insufficient to say correlation implies causation here; and I can't help but point out the use of words: "having a coalition government is probably a better outcome" has a subtle message compared to, say, "Coalition governments aren't a bad outcome". And yes, I agree that the India story wouldn't change much either way.



Mar 13, 2019

@Niranjan it's unfair to make comments like "narrative you are trying to build"; the same can be easily said for your comment too. Wish you had countered the point building a logical argument and perhaps using "real data" (since you're accusing the author of fudging). Waiting for a more constructive counter from you...



Mar 13, 2019

"having a coalition government is probably a better outcome than having a single-party government": I do not agree with that. You did not include the other alternative (including all the data fudging to prove that growth rates are higher under coalition govts) that the correlation does not imply causation! Moreover, you did not include the possibility that a single party government set the stage for a higher growth rate that a coalition government squandered away. Our experience from the last coalition government in memory is only that. But then, it doesn't suit the narrative you are trying to build.

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