PSU, midcap, smallcap shares: Average stock market returns in last 5 elections

A study on average stock market returns in the last five general elections suggests that the BSE Sensex and key sectoral indices do turn positive in three months post election outcome. On a sectoral basis, returns are seen positive across sectors six months post election results. Historically, small and midcap stocks outperformed largecap shares post results in every timeframe in past cycles, JM Financial said. Will history repeat itself? 

This time, elections will conclude on June 1 and vote counting will be held on June 4. The market is largely expecting 300-320 seat wins for incumbent BJP, as per a BT Markets survey. This would be against 303 seats that the Narendra Modi-led party won in 2019.  

As per JM Financial, while the BSE Sensex fell an average 0.5 per cent in the first month post elections, the BSE Smallcap index surged 10.7 per cent and the BSE Midcap index climbed 7.3 per cent during the same period. The BSE Realty index, which tracks commercial and residential real estate developers, delivered 16.5 per cent return, the BSE Power index gave an average 10.9 per cent return and the BSE Metal index delivered 8.6 per cent average return in the first month of last five elections. 

Information technology, real estate and consumer durables stocks, on an average, fared well in three months post elections. IT stocks delivered outsized returns, along with smallcap stocks, in six months post elections, JM Financial data suggested.  

Will history repeat itself? 
"We are cognizant that the above approach will even out  individual sector performance and may, hence, not repeat going forward," JM Financial said. 

The broking firm noted that the market performance was impacted by concerns around global slowdown during August 2019 and hence analysing returns post 2019 elections will not give a true picture. It rather looked for periods where market conditions were similar, i.e., 2014 general elections when equities were already performing in the run-up to elections. 

"We observed that sectors like Auto, Consumer  durables and Healthcare outperformed the benchmark index back then while on a broader  level SMIDs outperformed large caps.  We expect healthy gains to follow election results on 4th June, and we believe any dips should  be bought into," JM Financial said.

Policy continuity will ensure that the government’s main focus will remain on  infrastructure development and manufacturing, which will benefit sectors in defence and capital goods space. 

"However, unlike in past periods, in this cycle we prefer large caps over SMIDs in 2024 as we look for valuation comfort. 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," JM Financial said. 

At present, Nifty is trading at 20 times forward PE, closer to one  standard deviation from long-term mean, which JM Financial considers reasonable. 

"We believe that  post-election results, markets will shift their focus on to the Union Budget, which is likely to be tabled in July," it said.