Markets break the October jinx

Give positive returns of 4.64% in the month against 25-year average of -2%

Bucking a long-running trend of negative returns, the stock markets have given positive returns in October, historically the worst month for equities.

An analysis of data over the past 25 years shows October has recorded negative returns of nearly two per cent, making the month the worst for investing in equities. According to experts, what helped turn the tide this time is a combination of global cues turning positive as well as a number of reform-oriented steps in India.

The Sensex was down 631.17 points, or 2.37 per cent, at its low on October 16 this year. It closed at 25,999.34, up from end-September closing of 26,630.51. Foreign institutional investors had been net sellers by Rs 2,658 crore in the first half of the month. Subsequently, they were net buyers by Rs 3,241 crore in the second half, turning foreign investments for the month net positive by Rs 583 crore. The Sensex ended with gains of 4.64 per cent, or 1,235.32 points, to close at 27,865.83.

Rahul Shah, vice-president (equity advisory group) at Motilal Oswal Securities, said the markets turned positive in the second half. “The market had shown signs of nervousness in the first couple of weeks. The stability of global markets and the announcement of a stimulus in Japan helped drive markets higher subsequently,” he added.

Japan has announced an increase in the amount of money it injects into the financial markets. This move is expected to make more money available to invest in higher yielding emerging market securities, a basket which includes Indian equities. Nearly half of the 1,235.32-point gain on the Sensex in October came after the announcement, with the benchmark index gaining 519.5 points to close at 2,7865.83 on Friday. This makes it only the eighth time since 1989 when the Sensex has shown gains in October.

Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance, pointed to possible cultural reasons for the downside in the month of October.

“There are a lot of religious holidays during the month of October and it is possible that traders sell and keep their positions lean if they are not going to be in the market. One has observed that the bond market also turns slightly illiquid during the same period,” he said.

Andrew Holland, CEO, Ambit Investment Advisors, noted that the perception that October is a bad month for equities might be because of the fact that many of the worst market crashes happened in the month.

“The 1987 crash (in the US) was in October. The effect of the financial crises could also be seen in the month of October,” he said.

The Sensex had fallen 23.89 per cent in October 2008. The month of October has seen negative returns in 17 out of the past 25 years. The second-worst fall was in 1992, when the Sensex corrected 14 per cent.

A recent Bank of America Merrill Lynch report, too, noted the poor October returns in Indian markets. Data from the report authored by research analysts Jyotivardhan Jaipuria and Anand Kumar showed October as the worst, and February the best, month for equities. February had average returns of nearly four per cent, according to the report dated October 21.