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Elections, GDP Growth & Returns

As we head into 2019 the question I am asked most often is “What is my view of the elections and how it will impact the market”.


To this, my preferred answer is: ‘I don’t know’.


My next best answer is that it will have an impact, in the short run, but it’s rather hard to figure out what it will be.


Then I reach for history because it is available and it is always instructive to see what history says.


The chart below plots the GDP data for China as per World Bank in USD (1), the GDP data for India as per World Bank in USD (2). The Shanghai Composite Index in USD (3) and S&P BSE 200 Index in USD (4) are also plotted in the chart. This for the 16 year period from Dec 2001 to Dec 2017.


Election Fever Vetri DEC 2018-01 v220181227-101704

Source: Bloomberg


We know that during this period India has faced 3 general elections- 2004, 2009, 2014 and China does not really have multi-party system. During this period China’s Nominal GDP grew 14.82% p.a. in USD terms. India’s Nominal GDP grew at a slower pace than China at 11.14% p.a. in USD terms. Certainly, we should aspire to grow faster than we are currently growing. But, note that this faster GDP growth and lack of elections has not converted into better stock market returns in China. India equity returns as denoted by the S&P BSE 200 Index have out-performed China’s equities by a wide margin (both in USD).


I can only hope that this provides food for thought, for those who believe that election outcomes determine long run market outcomes. This should also give pause to the camp that believes that the uncertain outcome of elections converts into poorer market returns. Further, those who firmly believe that GDP growth is the sole factor that drives equity returns might also want to rethink their arguments. It’s a lot more complex than that. China has the better growth, an apparently stable political system and government but not the better stock market returns. India may have lagged on GDP growth and may have the specter of uncertainty brought about by constant electioneering and yet India has the better returns.


Those that worry about constant electioneering may also want to spend a moment thinking about the election cycle in the US. The US President is elected for a four year term but the US House of Representatives (Congress) has only a 2 year term and hence this is a 2 year election cycle. That recent election in the US was the mid-term and the next round will coincide with the Presidential cycle in 2020. Further, the US Senate witness elections every 2 years with 1/3 of the seats coming up for elections in each cycle with the Senators having a 6 year term. The election dates are co-incident with the Presidential-cycle and mid-term elections. As regards state elections – the governors have a 4 year term, but only 36 of the states run a common election cycle-coinciding with the mid-terms, but not the Presidential-cycle. The other 14 states have a different cycle. State legislature elections in about 45 – 46 states coincide with the mid-term elections. In other words, there is a lot of electioneering with a cycle of about 2 years.


Of course, there is volatility associated with elections. Emotions run high during elections and some of that spills into the markets. But, the data and history say it loud and clear. Elections and GDP growth are not the sole determinants of long term equity returns.



Mutual Fund investments are subject to market risks, read all scheme related documents carefully.



Vetri Subramaniam

Group President & Head of Equity at UTI Asset Management Company Ltd

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