It’s odd: Even years generate negative returns in May

Historically, May has been quite eventful for the markets with sharp movements on either side. An analysis shows that the ‘even’ years - such as 2000, 2002, 2004 — have generated negative returns, while the odd ones - such as 2001, 2003, 2005 — have been positive in the last decade.

The markets in April closed 1.6% down amid high volatility after having risen sharply by 9.10% in the previous month as investors turned cautious on account of domestic concerns like high inflation and some disappointments on quarterly earnings front.
“The results declared till now have not been great - they have been either in line with analysts’ expectation or slightly below. Also, there are concerns on interest rates and rising commodity prices. But liquidity has been the major force keeping the markets steady,” said Sanjeev Patni, president and head, institutional equities, at Prabhudas Lilladher.

Foreign institutional investors , who had bought shares worth `9,400 crore in the first three weeks, were net sellers by `2,400 crore last week. As a result, benchmark indices lost 2.4% last week.

Market mavens see volatility continuing in May with some key events such as the Reserve Bank’s (RBI) review of the monetary policy on Tuesday and then quarterly earnings deciding movements.

“Markets seem to have discounted up to 50 basis points (bps) interest rate hikes by the RBI in the forthcoming policy meet but if rates are hiked by just 25 bps, that would cheer the markets. However, markets may remain lacklustre in the near term on account of inflation and possible hike in petroleum prices post the elections,” said Patni.

“We expect the Sensex to correct to 18,000 index levels over the next couple of months as it is facing three headwinds in May. First, inflation will increase close to 10% as the government hikes prices of petroleum products once the assembly polls are over in May. Also interest rates are likely to increase by 100 bps till October and lastly, the results in May will likely disappoint leading to earnings downgrades. We expect current fiscal Sensex earnings per share to fall 3-5% over next 6 months,” wrote Jyotivardhan Jaipuria and Anand Kumar, analysts with BoFa Merrill Lynch in their investment strategy report last week.
However, experts do not see a deep correction in the markets over the medium term given valuations and liquidity.

“Even though we may see some weakness in the first week of May, the markets would recover in coming weeks. For the large caps like Reliance Industries, all the bad news seems to be priced in and any positive developments can lead to an upside. We may be pleasantly surprised in June,” said V K Sharma, head private broking and wealth managment at HDFC Securities.
“Liquidity would continue to support the markets. Also, if commodities do cool off anticipating some tightening by the US Federal Reserve in the coming months, that would give support to the markets in the medium term,” said Patni.