However strange it may sound, equity investors worldover like to look for trends. Believe it or not, equity markets are apparently driven by seasonality.
According to emerging market (EM) strategists, the period between May and October is not positive for returns from equity markets. Geoffrey Dennis, head of EMs at Citi, says: “We have long argued May is the start of a period of weak average seasonal performance for EM equities. The strongest rolling six-month period for EM equities since 1990 has traditionally been the November-April period, during which MSCI GEMs had risen an average of 1.8 per cent per month since 1990.” “Sell in May and go away” is not unique to emerging markets; it afflicts developed markets just as much.
Is the current weakness broad-based across EMs, too, or is this India’s cross to bear? This year, the season of sell-off seems to have hit Indian shores alone. Equities are down three per cent since May while other EMs are up three to five per cent. Spring does make fund managers bearish. Seven of the last 12 years saw Indian equities drop in May, while the MSCI emerging markets index has an equal split. Since 2004, markets have mostly declined in May, with the exception of 2003-2005, 2007 and 2009. In the past three years, markets fell in May. However, Vinay Khattar, head of research (retail) at Edelweiss Financial Services, believes it’s difficult to find a logical explanation to such a pattern.
This time, even experts are confused with the likely direction of Indian equities. While some brokerages have upgraded India to overweight, others have downgraded, as the macroeconomic conditions seem to have deteriorated. Undoubtedly, volumes have plummeted. But on the upside, there is no big pullout despite concerns over the General Anti-Avoidance Rule (GAAR). The market is, however, hoping that Monday’s meeting will either result in some relaxation or a deferment. Says Khattar: “The GAAR issue is a key overhang for Indian equities and any positive news on this front will help sentiments, as foreign investors are concerned about India currently.”
The other big overhang for the markets is the interest rate cycle, which has turned but is yet to see meaningful rate cuts. If both core and food inflation data continue to trend downwards, the central bank will have better leverage to cut rates. The situation in Europe and the US is better than what it was in December. In addition, most commodities except Brent crude oil are down. But over the past few weeks, Brent hasn’t shown any upside move. If it falls, sentiment would turn positive. Rate cuts along with lower crude oil prices would have a positive impact on the current account deficit. Analysts also expect gold imports to slow down this financial year. However, if none of these happen, the much awaited sell-off may materialise.