Financial markets describe any market place where buyers and sellers participate in order to trade assets such as equities, bonds, currencies and derivatives. They are defined by having transparent pricing, basic regulations on trading, cost and fee, and market forces that determine the prices of securities that trade. Financial markets have four important functions:
1) Mobilisation of savings and their channelization into more productive uses,
2) Facilitates price discovery,
3) Provides liquidity to financial assets,
4) Reduce cost of transactions.
Impact of Elections on Financial markets
Economic growth and policies of previous government play a key role in the upcoming elections of any country. Growth and development in previous years might lead to the government continue in power, whereas decline might see change in government. However, the election period increases the volatility of financial markets due to the speculations. Before the elections, the market formulates an opinion polls based on the campaigns and the impact of ruling government. The financial markets react based on the speculation. If the final result is as per market expectation or better, the trend followed would continue in market. But a negative result would impact the market on a downside. Irrespective of the movement in financial markets, one can expect high volatility due to the unpredictability of the results.
Hence, I would now concentrate on impact of new government leaders and their effect on the financial markets with examples from different Asian countries.
The Indian Financial System basically follows two events, Budget and Elections. While recession has deeply affected global economy, the general elections will not have less profound impact on Indian economy. The expenditure for the election in 2014 was expected to be around INR 10,000 crore, but a stimulus of INR 600 billion was expected to country’s GDP, according to Industry body of Asocham’s society.
India, the largest democracy nation and largest economy of emerging nations witnessed a growth slide in last 2 years under the UPA government. Leading foreign brokerages like Nomura, Goldman Sachs preferred government led by Narendra Modi, who was perceived to be pro-reform and investor friendly.
Modi, than CM of Gujarat, had transformed the state to an industrial hub. Modi’s leadership was reason for investors to invest in Gujarat irrespective of its position in economic development index of states in India. During his tenure, Modi provided indispensable leadership and steered the state toward greater economic goals and ensuring sustainability to growth. Vibrant Gujarat helped Modi attain candidature for PM of India in 2014 elections and was backed by major industrialist in the country. The markets and economy was in need of stability, and it was perceived that Modi would rejuvenate the country from its economic decline.
Table 1 Opinion poll of General Elections 2014
International investors bought stocks worth $2.6 billion since January 2014 and accelerated inflows. The impact on financial markets was bullish on this expectation. A Congress or third front victory was expected to have a negative impact on the markets.
Figure 1: GDP and Growth Expectations, BJP win scenarios
Table 2: Previous election event when market showed significant movement
Table 3: Market Returns
Figure 2: Market movements