Business Daily from THE HINDU group of publications
Tuesday, Apr 10, 2007
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Business Daily from THE HINDU group of publications Tuesday, Apr 10, 2007 ePaper |
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Stock Markets Markets - Insight Lokeshwarri S.K.
Chennai April 9 The Indian investors are a worried lot. The Sensex has registered a negative return of 5 per cent in the first three months of this calendar year. This loss is unacceptable to those who have begun dabbling in stocks in the last two years. A correction that extends beyond two months would be outside the realm of their imagination.
Factors attributed
Though the usual suspects such as inflation, interest rates, earnings slow-down, and liquidity are believed to have caused the dip, seasonal trends could also be playing a part in the dismal first quarter performance of the Sensex. It would hearten investors to know that the Sensex is in the habit of frequently registering negative returns in the first quarter of the calendar year. In the years between 2000 and 2007, it has delivered negative returns in six years out of eight. The cause for a subdued first quarter in Indian equities can be attributed to two factors. Firstly, the Union Budget announcement in the last week of February is normally followed by a disappointed response by the stock markets. The rush to unwind positions built prior to the event depresses stock prices in March. The second reason can be `tax-loss selling' hypothesis indicated by Prof I.M. Pandey of the Indian Institute of Management-Ahmedabad in his research paper titled `Is there seasonality in Sensex monthly returns'. In this paper, a parallel was drawn between the December effect in the US markets where investors book capital loss in order to reduce tax prior to their fiscal year end in December. Since the Indian fiscal year ends in March, selling the holdings that are loss-making was propounded as one of the reasons for the Sensex registering negative returns in March.
Strong performance
The strong exception has been 2006 when the Sensex recorded a 20 per cent gain. The strong performance in the first three months of 2006 can be attributed to liquidity from both internal and external sources that kept stocks buoyant. In 2002, the pull-back witnessed in global equities in the aftermath of 9/11 created the momentum that kept the stock prices buoyant till March 2006. A sharp slide was witnessed thereafter that lasted till November 2002. The first quarter performance of the Sensex is, however, not indicative of how the rest of the year pans out. The correlation between the first quarter returns and the full year returns for the Sensex for the 10-year period from 1997 to 2006 is extremely low at 0.28. The Sensex has given double-digit growth in the last four calendar years irrespective of how it performed between January and March.
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