The Hindu Business Line : Time for the November Effect

This is because the recent 1,000-point or 12 per cent drop in the Sensex in October sets the stage nicely for the phenomenon to put its stamp on yet another year.

The November Effect refers to the trend of stock prices rising in value every year between November of that year and February next year.

In the past decade, this has happened with predictable regularity, asserting itself in 10 of the past 14 years, starting from 1991.

The trend of rising prices come November has also been on show in each of the past seven years — a perfect 7/7.

Sensex & Junior Effect: On an average, the Sensex has risen by 15 per cent during this period over the past 14 years. The only year it lost value significantly was in 1994-95.

In that year, it lost 20 per cent. In the other three years it shed between1 and 6.5 per cent. If Sensex does go up another 15 per cent, then it will rise to about 8,900 by end-February.

That will not put Sensex into uncharted waters. If it gains 20 per cent or more then Sensex would have surged past its previous peaks.

The valuation of the Sensex is also not very different from what it was in previous years. The dividend yield of 1.8 per cent now is only a shade lower than the yield of 2.1 per cent in October 2004.

As the earnings of Sensex stocks has risen by an average of 20 per cent or higher, the valuation levels now may not be very different from what prevailed in October 2004.

Through the 1990s, at the end of October, Sensex stocks traded at valuations far richer than those prevailing now. More intriguing than the rise in the Sensex are the paroxysms of frantic activity that visit Nifty Junior during this period.

In five of the past seven years, Nifty Junior has gained substantially more than the Sensex.

During these years, Nifty Junior has outperformed even the CNX Midcap 200 between November and February. That is no mean achievement as mid-cap stocks have been on a roll in recent years.

Playing the effect: The straightforward way to take advantage of the effect, it would seem, would to be invest in Junior Bees, the exchange-traded fund.

In India, however, actively managed mutual funds have often fared better than index funds.

Thus, actively managed mutual funds such as DSP ML Opportunities, HDFC Equity, Franklin India Prima, Reliance Growth and SBI Magnum Contra are better placed to deliver value.

A more direct approach would be to identify potential winners within the basket of Nifty Junior stocks. The portfolio of Nifty Junior is now overweight on the banking sector.

If it has to outperform Sensex, banking stocks have to do well. If this trend materialises, one of the banking stocks could be a potential winner.

In 2004 when a similar position prevailed, ING Vysya Bank turned out to be a winner.

The stock turned in returns of 100 per cent between November and February.

Risks remain: It is annoying to use boilerplate language. Still, it is only fitting to invite attention to the risks.

There is no law that requires traders to bid stock prices higher in November. In any case, streaks, records and trends are meant only to be broken.

In addition, a good November Effect will only set the stage for decline in prices in the period after the Budget. Caution is thus advised.

In October 2004, the US Presidential election had been resolved to the satisfaction of the markets; the dollar remained under siege and global liquidity was not on the wane. Such macro factors favoured the continuation of the rally in emerging markets.

Global factors are strictly not in favour of such a rally now. Only sustained corporate profit performance and continued improvement in industrial activity can take the market higher.

Notwithstanding these issues, if November Effect does visit us once again on the back of improved liquidity, investors should resist looking this gift horse in the mouth.

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