How will Sensex perform 1 month after election results? Here’s what past suggests

Equity markets have reacted rather negatively on the Lok Sabha election results day to NDA's below-the-estimate performance. However, the indices bounced back to recover half the losses, leaving investors divided over what the directional trend will be.

If we look at the previous four general elections, benchmark returns more or less stabilised and gained post 5 days and 1 month of the results, irrespective of the performance on the counting day.

In 5 days after the election results in 2004, Sensex gained as much as 16%; while in the one month, the benchmark has returned about 7%. Meanwhile in 2014 and 2019, Sensex rose 2.2% and 2.5% five days post the election outcome.

Only once in 2009, Sensex delivered negative returns of 1.98% in the five days after the results and lost about 0.13% one month after the election outcome day.

Meanwhile, JM Financial's assessment of the last five general elections reveal that overall market returns turned positive in 3 months post results. However, on a sectoral basis positive returns are seen largely across sectors 6 months post results.

Small and midcaps outperform large caps post results in every timeframe in past cycles, data from the brokerage showed.

JP Morgan sees a post-election normalization of implied volatility in Indian equities, historically reverting to pre-election levels in about a week.

However, the potential resurgence of foreign investor participation, following significant outflows in May, presents a risk to this outlook.

"Increased foreign participation may sustain higher-than-usual realized volatility, potentially delaying volatility normalization," the brokerage noted.

What lies ahead?

Analysts are mixed on how the market is going to react in the next few days given the uncertainty around political stability and policy continuity.

While long term investor and India bull Mark Mobius predicted that the result day meltdown may have bottomed out, others like Raamdeo Agrawal see more correction in the medium term. Whatever the view, there is common consensus to proceed with caution and not jump the gun.

"The result day market fall may have bottomed out. But I think you have got to be cautious about that. It remains to be seen how the political situation turns out and what kind of policies will be followed by the new conglomerate of powers that take place," said Mobius.

The key catalysts that will likely have a bearing on the market direction include RBI's policy meeting on June 7, cabinet formation post-election, first 100 days agenda and major policy announcements and FY25 budget in July.

"We believe any dips should be bought into. On a sectoral level, we find valuation comfort in private banks and consumption space, which are expected to outperform the benchmark in the near term," said JM Financial.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)