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Suresh Parthasarathy

Research Bureau The current economic and political state of affairs may be different from those of 2004, but the investment behaviour of foreign institutional investors and domestic mutual funds remains the same in the run-up to elections.

During the run-up to the election until April 2004, FIIs’ cumulative investment was Rs 18,817 crore. In 2009, they made net investments of Rs 6,508 crore until end of April.

Domestic mutual funds have sold stocks on both occasions, selling Rs 219.2-crore worth stocks till April 2004. For the current calendar year till April they have sold stocks worth Rs 845 crore (net).

But when the markets melted post elections in 2004, foreign institutional investors changed their stance from buyers to sellers and sold stocks worth Rs 3,246.9 crore in May, triggering the collapse of May 17 when the BSE Sensex nosedived 10.2 per cent in a single session.

FIIs had affected sales of Rs 504.4 crore on that day. The mutual funds, in contrast, bought stocks worth Rs 341 crore that day. They also remained net buyers for May 2004, having made net purchase of Rs 1,005 crore.

But how they behave on May 18 after the market opens may be a big question for equity investors.

From its Satyam-induced low of March 6, the BSE Sensex has gained 50 per cent.

During this run-up, it was the realty sector (gain of 73 per cent), followed by banking (71 per cent) and capital goods (56 per cent) that led the rally. Defensive sector FMCG has gained 10 per cent for the same period.

Sectors such as capital goods and banking were the ones that fell the most in the May 2004 crash.

According to Emkay Research, in the last five general elections, the one-month return post polls were positive, barring 2004. For a 12-month period, 1991 was the best year with markets generating a return of 177 per cent after the polls.

The lowest return of 0.4 per cent was clocked in 1996. The only period that generated negative return for the 12 months following the elections was 1998, when the Government was short-lived.

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