Invest in markets after following the pattern

An analysis of returns by major indices during the past decade reveals that the market follows a pattern, one which can be used to position investments.

Rahul Oberoi/Money Today        Print Edition: February 2011

Equity investors on the Indian bourses have had a rather smooth ride over the past decade, with charts continuing to rise till the sharp fall during the global slowdown in late 2008. Fortunately, the markets have bounced back.

So, does the experience of the past 10 years provide a cue for what could be in store in the days ahead? As investors, both within the country and abroad, look to the Indian equity market for higher and consistent returns, we have compiled data based on the movement of the major indices-BSE Sensex and S&P CNX Nifty-along with investment patterns of FIIs, monthon-month over the past decade.

An analysis reveals some interesting patterns from which one can draw conclusions on the various market possibilities. These can help you with your investment moves.


The market mood depends on investment patterns adopted by entities such as FIIs, hedge funds, endowment funds, mutual funds and retail investors.
Rajesh Jain
Executive Vice-president and Head (Retail Research),
Religare Securities
The analysis clearly shows that monthly market sentiments followed a pattern, except in extreme scenarios, such as during the attack on the World Trade Centre in the US in 2001 or the 2008 global downturn. We have divided our analysis into two blocks of six months each, starting January 2001.

The monthwise returns by the key benchmark index, BSE Sensex, show that during the first half of the calendar year, bulls dominated bears in January and April in a majority of years. While the Sensex gave positive returns in seven of the 10 years in January, investors gained for six years during April.

However, March remained stuck with a bear market, giving negative returns during six of the 10 years. The data for February, May and June revealed no particular patterns, with positive returns in five years and negative in the remaining five.

More importantly, the last six months of the calendar year remained mostly in favour of a bull market over the decade, with the indices showing consistent gains (44 of the 60 months showed positive returns).

S&P CNX Nifty data also saw similar patterns throughout the decade. Perhaps the figures hold a message for investors as to what they should expect from the markets in the future.

December remained extremely positive for investors, with only one year (2010) showing a negative return, a meagre 0.99%. Says Sanjeev Zarbade, vice-president (private client group research), Kotak Securities: "I don't see any particular reason for bullish sentiments in December. The period from 2001-2010 just happened to be one of the best multi-year bull markets for India and, hence, the chances of positive gains were much higher. "Besides markets were in a recovery mode in December after market-disruptive events, such as the general election results in May 2004 and the September 11 attacks in the US."

According to experts, markets tend to remain cautious during the first half to gauge the effects of the monsoons and the Union budget. Zarbade says, "While the budget in February provides the policy signal for the next financial year, India's sizeable agrarian economy is largely dependent on monsoons for irrigation. A failed monsoon can have repercussions on domestic consumption and food inflation.

"Hence, Dalal Street tends to be cautious during the first half. Budget concerns start impacting the psyche of the investors in February and depending on how the budget compares vis-à-vis street expectations, markets tend to be soft or firm in March."

Rajesh Jain, executive vicepresident and head, retail research, Religare Securities, points out that the market remains hesitant till after the annual results of companies come in, a period that usually extends till May.

Liquidity in the Indian market is affected adversely in March due to payment of taxes and additional savings by individual investors for tax purposes.
Avinash Gupta
Vice-president (Equity Research), Bonanza Portfolio
However, Avinash Gupta, vicepresident (equity research), Bonanza Portfolio says, "The liquidity in the market is affected adversely in March due to payment of taxes and additional savings by individual investors for tax purposes. In this month, investors tend to cleanse their portfolios and sell loss-making stocks, which adds to the bearish sentiment."

Gupta points out that the second half of a year is normally a busy season for the Indian economy. Investors start taking an interest in the market and initiate positions ahead of the busy season. This, he says, explains why the bullish outlook for the market begins during the last six months of the calendar year. The positive outlook sustains till January.

Another important month was September despite the month giving negative returns in 2001 and 2008. However, there were unexpected events to contend with. In 2001, the September 11 attacks on the World Trade Centre affected global markets, including India, and in 2008, the markets tanked after the collapse of Lehman Brothers.

"These were extraordinary events that had impacted the global economy. It is anybody's guess as to what would have been the scenario if these events had not taken place. If these two years are ignored, then September is also a significant bullish month for Indian investors," reasons Gupta.

The second half of the year in India includes several months of festivities, which leads to a soaring of consumer demand. This results in a positive impact on the revenue figures in the last quarter of the year (October-December) and an upbeat mood in the market reflects this. Jain feels that 'seasonality' is also largely driven by institutional flows.

"It (the market mood) also depends on the investment patterns adopted by entities such as foreign institutional investors (FIIs), hedge funds, endowment funds, mutual funds and retail investors and their respective views on the markets at that point of time," he says.

Experts say that in order to ensure high returns, every investor should zero in on all major players in the market, including micro and macro forces. For instance, for institutional investors, the call on buy or sell is determined by market timing or 'tactical asset allocation'.

Tactical asset allocation is a strategy that actively adjusts a portfolio's allocation based on short-term market forecasts. The objective is to exploit inefficiencies or temporary imbalances in equilibrium among different assets and classes whenever and wherever such opportunities arise.


The period from 2001-2010
happened to be one of the best multi-year bull markets for India and, hence, the chances of positive gains were much higher.

Sanjeev Zarbade
Vice-president (Private Client Group Research), Kotak Securities
FIIs have an asset allocation strategy for every market in their global portfolios. So they tend to restructure and rebalance their portfolios dynamically across countries to minimise losses and maintain healthy returns. They do this on a regular basis and more frequently at the end of the year, when they review their tactical allocation vis-àvis the strategic allocation.

"September and December usually witness huge FII inflows due to quarterly corporate earnings expectations," says Religare's Jain. The above analysis can help investors gauge how the market might move in a particular month during the year. However, the capability to beat the market also depends on portfolio selection, among other factors.

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