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Waiting for Diwali break

Sep 28, 2002

It was another dull week on the bourses, as investors preferred to wait on the sidelines till any compelling trigger for action emerges. Sentiment at start of the week was impacted by the Akshardham temple attack and fears of a possible communal backlash. Also, U.S markets continue to spiral down, capping any revival in global equity sentiment. With a month left to Diwali, the general perception among investors is that markets tend to perform better in run upto the festival. We thought to highlight a study conducted last November to determine whether there is a 'Diwali effect'.

Taking Diwali day as 'day 0', the preceding one and two month point-to-point return does not seem to show a trend of markets tending to offer superior returns during the concerned period. In fact, more often than not, one would have lost money on the long strategy. In the last 11 years, markets declined on 7 and 8 occasions over the respective window periods. Considering the probability of decline selling index futures, buying index put options or writing an index call option could yield better returns.

Event (Diwali) Day '0' Preceding 1 mth Preceding 2 mth Subsequent 1 mth
1991 1,918.0 8.2% 5.9% -2.1%
1992 2,987.2 -8.3% -0.3% -14.4%
1993 2,786.4 2.8% -0.5% 24.0%
1994 4,303.7 -0.8% -4.6% -5.1%
1995 3,486.2 1.2% 4.7% -15.5%
1996 3,080.3 -1.5% -9.2% -9.1%
1997 3,803.2 -2.5% -3.6% -6.1%
1998 2,853.3 -7.7% -4.6% 3.9%
1999 4,650.5 -6.3% -2.7% 4.6%
2000 3,757.2 -8.1% -14.5% 5.6%
2001 3,113.0 5.8% 16.1% 8.9%
*All returns are point to point

That said, the feel good factor in run upto Diwali does not seem to be rubbing off onto the market. Therefore, the 'buy before Diwali' strategy does not hold good. On the other hand, a theory for the poor market performance during the window periods could be that investors -- and people in general -- prefer to stay liquid. Being an auspicious time of the year, one tends to undertake big-ticket purchases -- consumer durables, automobiles -- during this period. Consequently, funds are likely to be withdrawn from the stock market and invested in 'real assets' leading to the negative returns.

While selling may have already been exhausted prior to the run upto Diwali, there is not much compelling reason for buoyancy in sentiment. Over the past months, markets have repititively been hit by bad news. First was the deferring of oil sector privatisation followed by deferring of raising foreign direct investment (FDI) limit in the aviation, telecom and insurance sector. S&P, the international credit rating agency, downgraded India's domestic currency soverign debt to junk status. As per reports, India has dropped out of the ten most attractive destinations for FDI. Compounding the pessimism, GDP growth rate of the country has been revised downwards for FY03 by few agencies. International Monetary Fund has revised GDP growth to 5% from 5.5%. Domestic economy monitoring agency, National Council of Applied Economic Research (NCAER), revised growth rates down to 4.8% from 5.5% earlier. Adding to the concerns, the elections in Jammu & Kashmir could vitiate geo-politcal environment in the region. Gujarat continues to smother, and run up to elections in January '03 could witness similar events of this week to foment communal sentiments.

Having said that, market valuations -- BSE Sensex -- remain attractive at lows of 12.3x trailing 12 month earnings. As per reports, a fair multiple for the S&P 500 (U.S) is believed to be 15x earnings. Considering the growth potential of India, market aggregates could attract higher valuations of 20x earnings. The lower valuations, however, could be a market signaling that while potential exists, triggers to unlock the potential are consistently missing. One waits in hope...

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