Anticipated Market Rally: An Analysis of Elections and Macroeconomics

To understand the future, it's often helpful to examine the past. In this analysis, the focus is on the potential impact of an upcoming election season. Many are predicting a market rally, so let's take an in-depth look at this.

Pre-election Rally: A Historical Prospective

Firstly, it is essential to dive into the historical landscape of pre-election rallies. Notably, the market often sees substantial gains in the year leading up to an election. It's been analyzed across multiple election years, with a concentration on the returns the market generates in the one-year timeline pre-election, and six months prior.

For example, in 1991, the market gave a return of 63% in the year leading up to the May election. In the six months preceding the election, the Sensex rose by nearly 10%.

Similar trends can also be observed for the 1996, 1998, 1999, 2004, 2009, 2014, and 2019 elections. Of course, the returns varied, reflecting different circumstantial factors. It should be noted that in 1998, the market partly struggled due to political instability, resulting in flat returns.

Rarity of Negative Returns Pre-election

It is important to note that despite the variations, the market has generally trended positively one year prior to an election, barring a few instances. Even the six-months period has often seen a decent rally. The average of these returns hovers between 15-20%.

This analysis leads to the idea that there is potential for the Nifty to rally up to around 21,000, with Sensex at 78,000. Even with conservative estimates leaning towards 10% returns, the level still reaches 21,000.

Influence of International Macroeconomics

Along with internal factors, the state of international macroeconomics can also have a significant influence.

Quite recently, Japan make a noteworthy decision. They removed a cap that had kept Japanese government bond yields strictly at 1%. With this change, yields might rise above 1%, making investments in Japan more appealing to institutional investors.

It's worth mentioning that Japan is the largest buyer of US Treasury bonds. If the situation encourages Japanese investors to sell US Treasury bonds and invest domestically, it will increase bond supply, potentially lowering bond prices and consequently, increasing yields.

However, owing to the inverse relationship between bond prices and yields, an increase in yields could cause prices to drop. This sequence of events could lead to significant unrealized losses for US banks. The Federal Reserve might respond by lowering interest rates which may incentivize FIIs to invest in equity markets instead of bonds.

Such a scenario could see the FIIs, who have been net sellers in recent months, becoming net buyers. This could further trigger a positive surge in the Indian financial market.

In Summary

To sum up, two key factors may contribute to a potential market rally. Firstly, the historical trend of market rallies in the pre-election period. Secondly, the shifts in macroeconomics on a global scale, particularly linked to Japan's governmental bond yields changes. As elections approach & the international economic climate evolves, India's financial market could see substantial growth.