The year 2016 has been a catastrophic story so far for the Indian Markets. The wobbles in Chinese equity markets have impacted the global markets and Indian Markets have been no exception. The blue chip indices have seen a destruction of as much as 5% amidst the trading halt in China Markets after its indices hit circuit breakers of 7% twice in the last week.
Amidst the carnage in the broader markets, the mid-cap and small-cap baskets have resembled their outperformance of 2015 vis-à-vis the large caps. These junior caps have bucked the trend and have seen a meagre erosion of ~ 2%.
As January marches ahead in 2016, the Indian Markets continues to sink further and key benchmarks have already witnessed new 52 week lows and breached key psychological levels of 25000 and 7500 in the process. The first business 7 days of CY 2016 have already yielded a significant damage and any hopes of revival are looking gloomier with the worsening global jitters.
“As goes January, so goes the year” also known as “January Effect” is an age old adage. January 2016 so far has been a disastrous one and it needs to be seen how things unfold for the rest of the month and subsequently the year.
The following is an effort to analyse the historical trends of BSE Sensex, “First 7 Business Days Returns”, “January Month Returns” and their correlation with the respective Calendar Year Returns. The statistics from CY 2000 to CY 2015 have been used to evaluate whether “January Effect” is prevalent in Indian Capital Markets or not.
BSE Sensex: “First 7 Business Days Returns” & “CY Returns”
CY 2011 was the worst year in the pack with -6.40% returns in the 7 business days. The highest return in the basket was 5.80% in the year 2000. All in all, 9 instances out of 17 have yielded positive returns in the initial 7 business days of the Calendar Year.
The linkage between the initial 7 business days and calendar year returns reveal that 9 times they have resembled each other. However, when we drill down further, 7 times Sensex have yielded positive returns in the initial 7 business days and the respective calendar year. In the negative territory, 2011 was the only year when Sensex dipped -6.40% in first 7 business days and -24.64% in the entire year.
BSE Sensex: “January Returns” & “CY Returns”
On analyzing January Month returns, the worst year was 2008 with -13.00% returns in the first month itself and 52% for the entire year. On the flip side, 2012 was the best year with 11.25% gains but the entire year just managed to generate 25.7% returns. January Month has been positive on 8 occasions for Sensex and negative on another 8 instances.
When we compare January returns with calendar year returns for Sensex, 7 times they were in line with each other. Further analysis reveals that on 5 times, both January and Calendar ended in green however only two times they (2008 and 2011) they ended in losses together.
After the tragic 2015, it has not been an ideal start for 2016 and the first 7 days have witnessed losses to tune of 5% in BSE Sensex. The good part is historical facts reveal that there is not much correlation between January returns and the yearly returns in the negative zone. In the last 15 years, there have been just 2 occasions when January finished in red and so did the calendar year.
To turn things around, it will need a courageous effort from the Indian Stock Market to perform amidst the global worries. On domestic front, a lot will depend on Q3 Corporate Earnings, Budget 2016 and government policies in the first quarter, which will decide the outlook of rest of 2016.