Seasonality in economic activity
There is without doubt, seasonality in the economic activity in the country. The period roughly form Holi to Dussehra, is considered the lean season, when economic activity is restricted because of the hot Indian summer and the onset of the monsoons. Historically, this period has been plagued by droughts and floods and other forms of economic distress. This period has been traditionally considered the lean season.
The other six months, ie from Dussehra to Holi, on the other hand is replete with celebrations and festivities. The cooler climate leads to greater economic activity and celebrations and festivities associated with the harvesting season and the end of the year. It is also the marriage season and all these things result in a bump in consumer demand. This period therefore is the busy season.
The Reserve Bank of India (RBI) used to calibrate its monetary policy keeping these conditions in mind, with relative easing during the lean season and tightening during the busy season. But in recent times, with the advent of sophisticated irrigation methods, and the general rise in agricultural productivity, the difference between the busy season and the lean season has diminished somewhat. The RBI doesnot calibrate its monetary policy based on seasonlaity to the extent it used to.
However, in some other areas, this seasonal duality still plays a significant role. For example, the Indian Railways often charges a Busy Season charge on container traffic. Currently this is in vogue as the Indian Railways is levying a 10 percent surcharge on container traffic since October 1, 2023.
Seasonality in stock markets
Well obviously for stock market investors, there would be interest in knowing if the seasonality in the underlying economy also gets reflected in stock returns. While this blog does not have the space to do a detailed analysis, sector wise, on seasonality of sector stocks, we can nevertheless look at it in broad brush by analysing the Nifty Index.
The question is, does the market returns reflect the twin track pace of the underlying economy and if so, can investors benefit from any such pattern. In the quest for generating excess returns, any anomaly, no matter how unusual needs to be looked into. We will proceed to do that in the next section.
What does the data show?
In the table below, we have segregated Nifty returns of the past 20 years into two periods, May to October and November to April
| Year | H1(May-Oct) | H2 (Nov-Apr) | Annual Return |
|---|---|---|---|
| 2003 | 66.58% | 15.44% | 92.29% |
| 2004 | (0.51%) | 6.47% | 5.92% |
| 2005 | 24.62% | 50.05% | 87.00% |
| 2006 | 5.24% | 9.18% | 14.91% |
| 2007 | 44.34% | (12.45%) | 26.37% |
| 2008 | (44.14%) | 20.39% | (32.75%) |
| 2009 | 35.63% | 12.02% | 51.93% |
| 2010 | 14.01% | (4.46%) | 8.93% |
| 2011 | (7.36%) | (1.47%) | (8.72%) |
| 2012 | 7.08% | 5.53% | 13.00% |
| 2013 | 6.22% | 6.31% | 12.92% |
| 2014 | 24.28% | (1.69%) | 22.18% |
| 2015 | (1.41%) | (2.68%) | (4.05%) |
| 2016 | 9.88% | 7.86% | 18.53% |
| 2017 | 11.08% | 3.91% | 15.43% |
| 2018 | (3.28%) | 13.11% | 9.39% |
| 2019 | 1.10% | (16.99%) | (16.07%) |
| 2020 | 18.08% | 25.67% | 48.39% |
| 2021 | 20.78% | (3.22%) | 16.89% |
| 2022 | 5.32% | 0.29% | 5.63% |
A look at the seasonal returns shows a wide divergence between the two periods. These returns are set out below:
Returns May – Oct: 627%
Returns Nov – Apr: 308%
What we observe is that two thirds of the returns have come during the period May to Oct (lean season) while one third is during Nov to April (busy season). The fact that the returns in the markets are skewed towards the lean season may seem inexplicable but there is a good reason behind it.
We all know that the markets discount future events. During the lean season, the market anticipates the pick up in economic activity and therefore moves up. Similarly during the busy season, the market anticipates the slackening of economic activity in the ensuing lean season and therefore its reaction is more muted.
In other words, it pays much more to be invested during the lean season, the period from May to November than in the other six months. How pervasive is this phenomenon? Well marginally. During the 20 years that we looked at, in 60% of the cases, this phenomenon was observed.
Does it benefit stock investors
So how can investors benefit from this phenomenon. Lets look at the return statistics once again:
Returns May – Oct: 627%
Returns Nov – Apr: 308%
Total Returns – 1946%
The returns during the Nov – Apr period over a 20 year period was 308% which works out to a return of around 6%. There are fixed income products which give a return greater than that, but they would come with risk. Bank FD’s over a 6 month period rarely give a return greater than 6%. So it is possible to enhance overall returns by shuffling the investments between equities and fixed income but the difference would be marginal.
Conclusion
In the 20 year period the Nifty returns were 1946%. This works out to a CAGR of 16%. In other words, investments grew 20 times in twenty years! So even though there is this seasonality, it is best to overlook it and stay invested for the long run.
Mr. Soumitra Sengupta