Flavour of the Season

Since time immemorial when trading started with commodities or about 200 years ago when trading began with the stocks of companies, traders have been trying to understand the nature of the different cycles so as to use this knowledge for success in trading. A lot has been researched and written about the business and the economic cycles of different time periods and conditions. On a similar note, what we are trying to understand here is how different months and the events associated with them affect the stock prices. For example, the presentation of the railway budget in February has a direct association with the performance of the stock markets and the onset of the summer season makes the shares of consumer durables turn ‘hot’ since there is a buying spree of refrigerators and air-conditioners.

We will take such events in a sequential order and not necessarily as per the significance of the event, starting with the railway budget. It is believed that the stock markets begin to vibrate a month before the budget is announced. However, there seems to be no proof for the premise that railway stocks get heated before the railway budget. In the average calculation of the last ten years, it can be seen that all the major companies have yielded negative returns in the months of January-March (Table: Railway Budget Impact) both in absolute terms and relative to the broader market index, the Sensex. Therefore it might not be a good strategy to invest in such stocks prior to the railway budget. Next, the sector which is supposed to do well during the summer is that of the ‘cooling’ consumer durables.

Our study finds that for the months of April-June (Table: Summer Impact) the stocks of companies engaged in manufacturing air-conditioners and refrigerators have outperformed the Sensex. This relationship with the summer season can be proved from the fact that the stocks have been dull during the winter months. Therefore it is always wise to invest in these stocks at the start of April and exit at the end of July so as to be able to pocket handsome profits. Following the scorching heat of the summer, the monsoon is always the most important event that affects the stocks of various sectors. This is because a normal monsoon activates the rural population, comprising more than 60 per cent of the country’s residents.

There rises a strong demand for fast moving consumer goods (FMCG) products when the agricultural activity takes place as per the schedule. This is also true of agro-chemicals (pesticides). To check the impact of the monsoon on the agro-chemical producers, we took into consideration the performances of five companies and found that there indeed is a strong influence of the monsoon on this sector. The season begins from the onset of the south-west monsoon and ends in September. This is the time when the kharif crop is sown and it is also during this period that the stocks of related companies begin to soar, even to the extent of beating the Sensex returns (Table: Impact of Monsoon on Agro-Chemicals). A similar graph can be noticed during the sowing of the rabi crops that starts with the onset of the north-east monsoon in October, which leads to stocks yielding good returns during November and December.[PAGE BREAK]

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However, when we take into consideration the FMCG companies, there doesn’t emerge a clear trend. Though they have managed to beat the Sensex’ performance on a monthly basis, it is primarily due to the outperformance by a huge margin of some of the top companies that the average performance gets tilted. For example, the 9.97 per cent average return of Godrej Consumer Products in May lifted the average performance of the FMCG companies in that month. Similar was the case in April when Dabur posted better than average results. The three months when FMCG stocks usually post negative returns are January, March, and October. In the wake of the monsoon is the festival season.

This is the time when a lot of buying takes place, mostly of consumer durable goods. Though most of the current market leaders in consumer durables (mostly South Korean companies) are not listed, the companies that have a presence on the stock exchange have demonstrated better performances in November and December. When we analyse the festival season’s impact on two-wheeler manufacturing companies we find that they have yielded negative returns during October and November as compared to the Sensex. As for four-wheelers, there is an absence of any clear trend. Moreover, these stocks have underperformed in eight out of 12 months, the highest among all the sectors. The conclusion is that except for agro-chemicals and consumer durables, there does not exist any strong correlation between a particular season and stock returns. But given the data and the methodology, you are free to draw your own interpretation.