Wall Street often kicks off the year with a 'January effect' when shares rise more than any other month, but back home, an 'April effect' could be at play on Dalal Street, according to one research note, where stocks often shine the brightest. Data also shows that sectors can sway more during their preferred months of outperformance or underperformance.
An analysis by Axis Capital has shown that the month of April has seen positive returns on 12 occasions in the last 15 years, the most compared to any other month. On the other hand, February has been the bleakest in terms of monthly returns.
The ‘seasonality analysis’ by Axis Capital experts Neelkanth Mishra, Abhay Khaitan and Vishal Rangarajan showed impact on sectors as well, with historical data showing certain sectors and companies perform better in certain months.
This is significant as a strong seasonality correlation can be a useful tool to understand recurring market behaviours, which can shape trading strategies, the report said.
“We find evidence of seasonality in the Indian market performance; April is the only month with positive returns 12 times in the past 15 years (ex-2020), with a median return of 2%, and minimum performance of -2%, lower than any other month,” the Axis Capital note said.
“This is likely driven by higher MF flows in March (higher SIP, discretionary) which are likely deployed in the market in April. On the other hand, February is the only month that sees a negative performance (on average) with a median return of -2%, with a broad-based decline across sectors,” the report added.
Most sectors too have a favourite month, and a not-so-favourite month, said the report, while adding that IT as a sector sees ‘significant seasonality’, and has underperformed in April on 13 occasions in the last 15 years.
“In IT, stock-wise patterns are starker; Infosys underperformed 14 times and Wipro 12 times in April. This is likely driven by the full-year guidance by Infosys, which tends to be conservative, thereby hurting sentiments for the sector,” the report said, adding that TCS and HCL Tech too have also shown a similar trend.
“Financials outperform in October (11 times), led by ICICI Bank (13 times) and Indian Bank (12 times), likely driven by better clarity on credit growth, which usually surges in H2 of a fiscal. We also find evidence of underperformance of Real Estate in August, usually after a strong show in June-July, and outperformance of Metals in December due to higher Chinese prices,” the note added.
As per the report, real estate tends to underperform the market in August, with a mean underperformance of -4% (median: -4%), repeating the underperformance 12 times in the past 15 years.
The seasonality analysis, by itself, cannot be conclusive and deterministic, the note has caveated, but combined with other fundamental factors, it can be used to adjust trading strategies, manage risk, and potentially improve investment outcomes.
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