Why election investing isn’t for all

To say that general elections 2014 have captured the public’s imagination would be stating the obvious. It’s not every day in a cricket-crazy country like ours that the IPL is relegated from the front page to the sports page. The magnitude of the election frenzy can be gauged from the fact that it has now spread to the domain of investments. Business dailies and channels have a plethora of ‘election investing’ tips to offer. Investors are being advised as to how they must position their portfolios to benefit from the impending election results.

What’s driving election investing?

It is widely believed that the NDA will form the next government and that markets will respond positively to the same. In fact, some have even termed the recent run-up in markets as a ‘hope’ rally. Others are invoking history, and banking on it being repeated: in 2009 when the UPA gained a majority (defying the odds) markets rose sharply.

But isn’t that speculation...

To be fair, investing in markets is a forward-looking activity i.e. assumptions are made and a hypothesis is built around it. Expectations of what may happen (going forward) are factored in while making investment decisions (at present). 

However, when investors pin their hopes solely on an event such as election results, they are speculating. Effectively, they are emulating soothsayers and trying to forecast not only what the outcome of the election will be, but even how markets will react to the same. 

And for those who believe that market behaviour after election results is a sign of things to come, here’s something to mull over. In 2004, when the incumbent NDA was voted out of power, equity markets tanked; however, that was followed by a strong bull run which lasted until early 2008. Conversely, when the incumbent UPA returned for a second term in 2009, markets skyrocketed; that was followed by one of the most testing periods for equity markets. Simply put, investors who would have based their investments solely on how markets reacted to election results would have been in for an unpleasant surprise.

What investors must do

It comes down to whether one is a long-term investor or a short-term investor. For a short-term investor who bases his investment decisions on momentum, sentiment and news flow, and is willing to trade aggressively, the election period (i.e. days leading up to the result, the result day, and the ensuing period) is undeniably important. There will likely be several opportunities to ply one’s skills and make money.

Conversely for the long-term investor, the election result isn’t particularly important, and he can afford to be passive. To begin with, he doesn’t have to re-align his portfolio in expectations of what may happen; neither does he have to buy-sell at a furious pace to benefit from the volatile markets.

If anything, it might be an opportunity to clean-up the portfolio. For instance, if the markets do indeed rise sharply, it will be a good opportunity to sell investments that aren’t right for the investor, or are overpriced at a neat profit. Conversely, falling markets might offer opportunities to make some bargain buys. But any further focus on election results will be a futile exercise. 

In the long-run, while several factors can have a fundamental impact on the attractiveness of an investment avenue, the election result is certainly not one of them.