Historically I have never been a believer in stock market seasonality and would typically laugh off comments where people would recommend buying into particular months or selling into others. The most often used seasonal comment in the markets is "Sell in May and go away". However as I looked at data over the last 4 decades it more and more became clear that there is some seasonality in stock markets. Not that it always works, but it works in most cases. In-fact sell in May and go away came out to be the worst analysis of seasonal trends as an analysis of Indian Markets actually shows that the June to September period is the best period for the stock markets where nearly 50% of the returns of the average annual returns are made.
The other interesting observation is that the returns that the stock markets gave, in terms of the movement of the BSE Sensex on an annual average basis was much higher in the years pre liberalization. For example, tha analysis of data from 1980 till the year 2012 indicates that the average annual returns from the markets have been 20%, however the data from 1992 onwards indicates that the average returns from the markets have fallen to around 14%. This is quite counterintutive in a sense as we would ideally believe that returns post economic liberalization would be higher. However data points otherwise. Infact the decade following 1992 was actually a lost decade for stock markets in India where the Sensex remained at a level of 3000 till the beginning of 2003 right where it was a decade back. However in this time period new sectors emerged that did create wealth for investors, specifically Technology and Indian Pharmaceutical companies along with a wide variety of FMCG companies.
The broad data points are as follows
Average annual returns from 1980-2012 20%
Average annual returns form 1992-2012 14%
The reason why I broadly thought of looking at past data on seasonal market performance had to do with the broad recommendations coming out these days where investors are being advised to book profits on any rise rather than buy on dips. If History is any guide this is a time to buy on dips rather than sell on rallies.
Broadly looking at data the following figures come out
Average June to September returns from 1980-2012 8.6%
Average June to September returns form 1992-2012 6.4%
Another interesting observation is that subsequent to this strong period typically Octobers are tough months where the average negative returns from the month of October has been -1.5%, competing closely with March to be the worst performing month. The logic behind such markets movements is difficult to comprehend. Maybe it is related to the summer holiday season where there is a reduction in activity and as such the probability of negative news flow is low. However we do remember the months of September is both the 9/11 attacks and the Lehman fiasco happened in that month.
The stock markets have been reacting to global markets news flow as well as to the results season which has progressed with great gusto over the last three weeks. Positive results have been rewarded and negative ones punished severely. However on an overall basis the results season has passed off as a neutral one where we have seen selective Automobile, Private Sector Financials, Telecom & Pharmaceutical companies showing strong results. On the other hand the worst results have been from PSU Banks and Commodity companies, where the stress on the balance sheets is clearly visible in PSU Banks. Commodity companies are reeling under the stress of low demand & high interest rates.
The bigger action has been on in the government bond markets where we have seen a sell off in developed market bonds and a rally in Indian bonds. Subsequent to the hawkish statements that RBI Governor Mr Subbarao put out after the last Monetary Policy meeting and the small bond sell off that followed we have had a huge rally in government bonds where the absolute returns from the 10 year bonds over the last two months has been nearly 5%. This is a reflection of the fact that RBI has not been able to forecast economic trends very well & a dangerous situation for the economy as policy is being framed under assumptions that are far away from reality. The absolute crash in the WPI inflation and the likely crash in CPI inflation over the next 5 months is for most people who can analyse data to see. 10 year bond yields have fallen from nearly 7.9% to 7.35%. In fact the new 10 year benchmark which was auctioned last week trades at 7.12%.
In the meantime the favorite pastime of traders worldwide has become watching the movement of the Japanese markets and the Yen. Nikkei was up 90% over the last 8 months before correcting by around 8% this week. The Yen has fallen 35% in the same time period. Nikkei whose movement would not even be noticed by most market players till Abenomics took ground might have become the most searched word on Google lately. As such Japanese markets that till sometime back had no impact on global market trading let to a crack in most markets this week. However the reality is that in the time when the Nikkei has almost doubled most emerging markets have been flat to up a few percentage points. Moreover the money printing by the Bank of Japan has just started and is likely to go on for a prolonged period of time. As such the Yen carry trade will only gain steam and not moderate going forward.
As far as India goes the good part is that interest rates are definitely headed down going ahead, however the constraints to growth that come from government inaction still remain. Mr Chidambaram whose statements on reviving economic growth as well as reducing impediments for investments have been taken very positively by investors is also slowly losing credibility now. The lack of cohesion between various ministries is quite visible which impedes progress. The next few weeks, prior to the start of the monsoon session will be important from the perspective of government actions. The progress of the monsoon will also be closely watched over the next 15 days.
The trend of the markets is clearly up, the pace of the upmove is however uncertain. The only significant risk in the near term comes from a correction in the US, German and Japanese markets that have rallied sharply even as Emerging Markets have languished.