No September effect for Indian markets? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

No September effect for Indian markets? 

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In this issue:
» 5 years after Lehman collapse, banks far from crisis!
» NREGA wages under scanner
» How far is India's import cover from 1991 crisis?
» Should India Inc. take cues from MNCs?
» ...and more!

A Kansas University study published by the Wall Street Journal has some interesting observation about market behavior in the month of September. It seems, if someone started investing in 1802 and kept his money in stocks only during September, he would have lost more than half of his money by 2006. Doing the same during any other month, the investor would have gained at least 79% during the period! Call it weird or baseless, the 'September effect' as it is called in the US, is not entirely ignored by even the largest fund managers. Explanations for the negative trend in September, are hard to come by. Needless to say, they are even harder to swallow. Striking September events, such as the 2008 collapse of Lehman Brothers and the 2001 terrorist attacks, are partly responsible. But since these are more recent events, one can hardly explain why stocks have fallen in more than 50% of Septembers since 1926.

On many occasions the impact of the September decline was seen in the month of October. As Mark Twain wrote, "October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February." Rest assured, like most other short term trends, the negativity about investing in the months of September or October, have no fundamental logic. However, it would certainly be worthwhile for investors to be wary of speculative trends.

Septembers, for Indian stock markets, have not been very different from what they have been globally in the past few years. The overwhelming influence of foreign investors (FIIs) on Indian markets is the obvious reason. However, September 2013 has started out on an unusually buoyant note for smallcap stocks in particular. In fact, the valuations of smallcap stocks this September are way above the 5 year average. In comparison, the price to earnings valuation of bluechips and midcap stocks in September 2013, are below the averages (18.9x and 17.4 x respectively). Notwithstanding the sharp fall in earnings growth for smaller companies, the rise in PE valuations can also be attributed to speculative trends.

Source: BSE

Whether or not this September will turn out to be any different for Indian stocks is anybody's guess. Indian markets have behaved very differently from that in the US over past few weeks. However, while the market behavior may suggest otherwise, fundamentally, the month of September has brought no reason to cheer. For stock investors, the concerns over economic and earnings growth are here to stay. And neither the new RBI governor nor a new government can change things overnight. Whether or not for the 'September effect', investors would do well to remember the theory of reversal to the mean.

Which are the stocks that are set to chart the course of reversal to their mean valuations sooner than later? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to broad views on global stock markets, you might also be looking forward to our views on few unexpected movement in stocks. And that is why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!

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01:35  Chart of the day
This was the key indicator of the Balance of Payment crisis that India countered in 1991. The country then had reserves to cover barely three weeks of imports. While the Finance Minister, the government and bankers may insist that India is currently far from such a critical situation, statistics do not point in that direction. At 7 months, India's import cover is currently the worst it has been since 1994. And barring the recent recovery in the rupee and fall in oil prices, which themselves are temporary trends, the fall in India's import cover is a scary trend. A reversal in the same can only be brought about once the country's manufacturing growth and export volumes gather pace.

Source: RBI

Do you think India is closer to the 1991 crisis? Please share your comments or post them on our Facebook page / Google+ page

The 2008 financial crisis was the worst in recent history. Not just because it brought big banks and financial institutions down on their knees but also because of the recessionary trends it sparked off in the developed world. The risky practices adopted by banks were one of the major reasons that spawned the crisis. So badly affected were they that massive doses of liquidity had to be pumped into them to shore up their capital. Has the situation improved five years down the line? The answer to this is certainly not a resounding yes. The consensus is that banks are certainly safer. But are they safe enough? And the answer here seems to be an emphatic no.

No doubt on the capital front, most of the big banks are better than what they were 5 years ago. But the system still seems too leveraged, complicated and interconnected to withstand a crisis. Banks that were deemed 'Too Big to Fail' and had almost failed have only gotten bigger. This does not bode well considering that these were some of the very factors that sparked off the crisis in the first place. There has been lot of talks on more regulation and measures to reduce these risks. But most of these efforts have been murky at best and fraught with too many hurdles. So unless this issue gets resolved, the possibility of another crisis looming cannot be entirely ruled out.

Wages under the Mahatma Gandhi National Rural Employment Guarantee Act has been indexed to the consumption patterns of 1986-87. As per estimates, expenditures on food in the rural parts of India formed nearly 65% of the expenditure during the base year. The same is now believed to form about 49% (FY12). The weightage given to food in the Agriculture Labour - Consumer Price Index stands as high as 69%. Since consumption patterns have changed over the years, combined with the spiraling food prices in recent times, the government believes that the wages hikes have been too high of late. And thus, there is a need to change the calculation for the respective CPI - which in turn helps in calculation of rural wages. The high wages under this program have been often blamed for causing a spike in farm labour wages. The government expects the reworked figures to curb the high rise in wage hikes. This is a positive in terms of lower increase in government expenditure over the long term. But how much of an effect it would really have on rural India is difficult to gauge since the effectiveness of this program (due to factors such as corruption) has been in question for a while now. But assuming things remain the way they are, it would possibly bring about doubts over the rural consumption theme over the long term.

The Indian economy is clouded by a sense of gloom for quite some time now. Despite opening up of multiple sectors, the foreign companies are not ready to step in. And who can blame them? Even Indian companies are losing interest in the country and scouting for investments abroad.

At a time when everything seems to be going wrong for the country, Unilever's increase in stake in Hindustan Unilever Ltd is like a breath of fresh air. It is true that a lot has gone awry for the Indian economy, thanks to poor governance, corruption and policy logjam. In such times, the only leverage one can offer India is the rising and aspiring middle class and chances of consumption driven growth. It is on the back of this promise that Mr. Huet, the Chief Financial Officer of Unilever group is making a long term bet. However, we believe that the consumption story cannot be seen in isolation. With the slowdown in the overall economy, falling rupee, lack of investments and rising inflation, consumption story cannot hold on its own. It needs effective governance and some patience from Indian companies. It's time that the Government and India Inc. join hands to restore faith in the Indian economy. The latter should perhaps take leaf from Unilever's move.

How do you make most of your payments? With internet banking and debit/credit cards, electronic monetary transactions are on the rise. But by large, most people in the country exchange hard cash. Though we may not often think about it, but using hard cash has many costs attached to it.

What is the cost of cash? This is the subject of a study by some researchers at Tufts University. So far, they have published their findings about the US. As per the study, the use of dollar bills and coins costs the US economy at least US$ 200 bn every year. That's a whopping US$ 1,739 per household! It costs time and money to access cash. For businesses, there is the cost of storing cash. In case of the government, there are costs related to making the currency. And yes, lost tax revenues.

What's the key to lowering use of hard cash in the economy? One, financial education. People have to be education and trained to use electronic money. Second, financial inclusion. People need to have bank accounts in the first place to be able to use electronic money. But in a country like India, there are other challenges such as the predominance of black money. People may be unwilling to go for electronic transactions because that would bring them under the tax radar. In addition, people have to be convinced that electronic forms of payment are easy and safe.

Profit booking in engineering, telecom and FMCG heavyweights has kept the key indices in Indian equity markets below the dotted line for most of today's session. The BSE Sensex was trading lower by around 33 points at the time of writing. Key indices in Asia closed a mixed bag today while Europe has opened flat to positive.

04:50  Today's investing mantra
"The best buys have been when the number almost tell you not to. Then you feel so strongly about the product. Almost every business we bought is takes 5 or 10 minutes in terms of analysis. If you don't know enough to understand the business instantly, a couple months of analysis won't change that too much. " - Warren Buffett
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2 Responses to "No September effect for Indian markets?"

girish shah

Sep 14, 2013

pl do not mix up Hindustan levers problems with your's
lever has a prob. of where to put the euro's which it had in europe which is likely to crash or get into trouble --so they found the indian arm best suited for their long term interest


Ganesh Sastri

Sep 12, 2013

In 1991 India's trade deficit was $ 6B. In 2013 it was close to $ 250B. This is NOT sustainable. GOI or RBI or GOLD alone are NOT responsible for the MASSIVE trade deficit. We the people of India need to share the blame. Unlike China, we have been unable to export QUALITY products in a big way. We have a big dependency on imported oil ( crude and vegetable), coal etc etc. The exchange rate of INR should be such as to reduce the trade deficit to zero and eventually to turn into a surplus. We should not be hung on any specific exchange rate. The situation on FX front in 2013 is far more dire than what it was in 1991. Another major proble has been a MASSIVE INFLATION that has been there in everything: Wages, real estate prices, rents, cost of living. GOI is mainly responsible for this through its deficits and should learn to LIVE WITHIN ITS MEANS.

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