Opinion: Markets Don’t Vote — Decisions Driven By Political Ideology Can Be Costly For Investors

Investing is often framed as a rational exercise, governed by economic principles and market fundamentals. However, behavioural finance has repeatedly shown that personal biases especially political and ideological ones play a significant role in shaping financial decisions. The Indian stock market, much like its global counterparts, reflects this intersection of economics and politics. But is investing through a political lens a sound strategy, or does it carry risks that outweigh its perceived advantages?

The Cost Of Politically Driven Investments

The concept of the ‘invisible hand’, introduced by Adam Smith in ‘The Wealth of Nations’, suggests that markets self-regulate when investors make rational, unbiased decisions. However, when investors allow political ideologies or personal beliefs to dictate their financial choices, they risk disrupting this natural equilibrium.

Behavioural economists Daniel Kahneman and Amos Tversky have extensively demonstrated how cognitive biases lead individuals to make flawed financial decisions. One such bias is the tendency to align investments with political loyalties rather than market fundamentals. This phenomenon is evident worldwide, including in the United States and India, where politics and investment decisions are becoming increasingly intertwined.

The Perils Of Ideological Investing

In today’s hyper-politicised environment, it is not uncommon for investors to allow their ideological leanings to guide their stock market choices. This is evident in the United States, where conservative-leaning funds like the Defiance MAGA Seven ETF have emerged, investing in companies perceived to benefit from Donald Trump’s policies. However, the performance of such politically motivated funds has been underwhelming. Trump Media & Technology Group’s stock, which initially soared post-election, fell by 34% within months.

A similar pattern is visible in India, where government-linked sectors such as infrastructure, defence, and public sector enterprises often see a surge in investor confidence following electoral victories. However, historical trends suggest that market gains driven by political sentiment are usually short-lived.

When the Narendra Modi-led government first came to power in 2014, stocks in sectors expected to benefit from its economic policies like infrastructure and defence saw sharp rallies. Yet, companies such as Infrastructure Leasing & Financial Services (IL&FS), which had been favoured by investors on the assumption of strong government backing, eventually collapsed under a mountain of debt in 2018. This serves as a stark reminder that while government policies may create favourable environments for certain sectors, they do not insulate businesses from fundamental economic challenges.

The Illusion Of Ideologically Aligned Investing

The growing trend of Environmental, Social, and Governance (ESG) investing, often championed by progressive investors, offers a parallel case study. ESG funds have attracted billions globally, yet their performance has not always matched the hype.

Karl Marx, in his critique of capitalism, argued that economic structures are often dictated by a select few while the masses operate under false consciousness, making decisions based on emotions rather than rational economic interests. This applies to investment strategies as well.

For example, BlackRock’s iShares ESG Aware MSCI USA ETF has underperformed the S&P 500 by an average of 0.3% annually since 2016. In India, ESG investing has gained traction, but challenges persist in terms of transparency, corporate governance, and the real impact of such funds. Despite their popularity, ESG funds remain vulnerable to the same market forces that influence traditional investments.

The lesson here is that market movements are dictated by economic realities rather than ideological commitments. Whether an investor chooses to avoid certain stocks due to environmental concerns or invests in politically connected companies based on policy expectations, the market ultimately rewards performance, not sentiment.

The Indian Stock Market: A Political Barometer?

While it is undeniable that government policies shape economic landscapes, the assumption that electoral outcomes alone determine market trends is flawed.

In the banking sector, for example, there was heightened optimism after the 2019 elections around public sector banks (PSBs) due to expectations of financial sector reforms. Yet, despite government initiatives, PSBs have faced structural issues, including non-performing assets (NPAs) and governance challenges, limiting their long-term returns.

The broader lesson is clear, which is that, while government policies influence market sentiment in the short term, economic fundamentals ultimately determine stock performance. Investors who bet solely on political affiliations rather than financial strength may find themselves exposed to avoidable risks.

Beyond Political Preferences: A Rational Investment Approach

So, how should investors navigate a market that is often influenced by political rhetoric? The most successful investors — whether in India or globally — follow a disciplined, data-driven approach. Warren Buffett’s long-held philosophy of investing based on fundamentals rather than speculation is particularly relevant in the current climate.

To build a resilient portfolio, investors should consider diversification across sectors and asset classes. Relying too heavily on politically linked stocks can increase risk, while a balanced portfolio — including sectors less influenced by policy fluctuations — provides stability.

Alongside, maintaining a long-term perspective is crucial. Short-term market reactions to political events are often exaggerated, but a focus on businesses with strong fundamentals ensures sustainability. Political beliefs should not cloud judgment when evaluating a company’s performance. Financial metrics, industry trends, and management quality should remain the primary factors in investment decisions.

Investors should also avoid reactionary investments. Markets often factor in political outcomes well in advance, and reacting impulsively to election results or policy announcements can lead to costly mistakes.

Political preferences can shape many aspects of life, but they should not dictate investment decisions. The Indian stock market, like any other, is driven by earnings growth, macroeconomic trends, and global factors rather than electoral outcomes alone.

History shows that politically aligned investment strategies — whether based on nationalism, ideological commitments, or policy expectations — often lead to suboptimal financial results. The smarter approach is to remain objective, focus on long-term financial health, and recognise that markets operate independently of political ideologies.

At the end of the day, the stock market rewards sound financial decisions not political loyalty. Investors who recognise this will be best positioned to navigate the uncertainties of both politics and markets.

The writer is a Bengaluru-based management professional, curator, and literary critic

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