These are the times of extreme volatility and irrationality. The domestic growth rate is close to decade lows. There seems hardly any respite in the near term. However, the markets are singing a different tune and touching new highs. One obvious factor behind the current phenomenon is BJP's win in the state elections. Political proponents believe that is a signal of change in the government at the Centre which will turn country's economic fortunes.
This is just another reminder that we hardly ever learn from history. It has been corroborated by stock markets time and again that it is the global macroeconomic factors that determines their levels and direction and not the party in power. An article in Livemint shows real gross domestic product growth at factor cost around election years. The study suggests that irrespective of the party in power - UPA or NDA, the markets have broadly reflected the global macro environment. There have been enough instances when the economy has performed well despite a weak government in place. The events like Asian crisis, global dotcom boom and bust and Lehman crisis explain the Indian stock market movements better than the political cycles.
Even the current highs are mainly on account of foreign money finding its way to Indian stock markets. And of course the sentimental boost from the result of the polls. In such times, we would suggest investors to not fall into the election trap. While such events can lift the markets now and then, sooner or later the ground realities take over. It will be interesting to see if the Indian stock markets can maintain these levels if tomorrow Fed announces a taper with immediate effect.
To conclude, it will be naive to assume that a change in the Government will revive the economy by default. While dramatic policy changes such as the liberalization of Indian economy in 1991 do impact the growth rate, such reforms have been rare and have been taken only as a last resort. In the era of coalition politics, those who are pinning hopes on major reforms are likely to get disappointed. The long term problems in Indian economy are unlikely to fade away. As such, focus on the stocks with robust fundamentals and attractive valuations. And in the long term, you are likely to benefit irrespective of the party in power.