Will `October Effect’ Play Out Again on D-St?

Will `October Effect’ Play Out Again on D-St?

Mark Twain QuoteWhen there is fear in the mind, everything you look around gives a bigger challenge. The comment Mark Twain had given here shows that very clearly. After weakness in the market since August, post China Crisis and Volkswagen Scandal, now media is searching all possible fear thoughts to intensify the situation.

If there is fear of losing, not only October, every month will be a disaster, one who has such thoughts will end up not having great wealth while his friends and family live a happy life taking  a little extra risk on their investments.

There was an article in Economic Times on 1st October 2015 with the following headline “Will `October Effect’ Play out Again on D-St?”

October FallsInvestors generally tend to become nervous in October because the biggest market falls in 1929, 1987 and 2008 happened during this month

And there is a supporting table showing downward moves in the month of October on the SENSEX.

If October has a historical downward effect, why has it not occurred in all the years? Apart from 1997 to 2000, where there was higher falls in October which was continuous, there is a lot of gap and it does not have any pattern.

1997-2000 was a prolonged bear market for India, and it is because of such a long base formation that we have had the tremendous rally post 2003, which has taken the SENSEX to a 600% gain in the next 15 years.

2008-09 falls was a correction after the phenomenal rise and after 2010; 2011-13 were almost flat years which has helped the next rally that is happening now.

In the years that had weaker October’s, there was reason for this thought to hold good. Markets had on a overall manner gone into tightness following adverse news flows. Prior to every such weakness, the markets have had maniac runs. In 1929, rapid growth in Bank Credit and Loans made people take huge loans and invest into stocks, where actual valuations were far below, collapse was huge. In one year markets lost 90%.

In 1987, on a single day, market dropped 22.60%, this was again because of maniac buyouts and mergers using liquidity created by sale of Junk Bonds by the corporates. People were buying into companies that had literally no assets, all of the price rise was happening due to the rush to buy something that is available and at whatever price it was available at.

More similar to what is happening now in the Startup space. Fortunately, we don’t have any of the almost zero value loss making e commerce businesses listed in our exchanges, while it will soon come up. For now, the start up space is raining funds. Those people who earned fancy salaries in tech companies have loads of cash and are chasing every idea that is coming in the markets, as it is, in just about 2 years, there is some tiredness seen in this space. Whereas, this rush will not end here, it will take away more greedy minds by getting listed in the markets. And that will happen in the next 3-4 years, till then India is safe. The moment you witness junk companies coming out with IPO’s and they getting subscribed multi-times, close your wallet for investing and open your bank account to receive the sale proceeds of your stocks.

Without second thought liquidate all holdings. Wait!, it is still way to go to reach that situation, until then capitalize on the rally, it will for sure be a maniac rally, the difference is that we are just in the beginning, which gives a lot of scope for multiplying your savings.

The 2008 crash, again happened due to excess lending for home sales, financial assets tumbled, some big names like Lehman Brothers, Bear Sterns, AIG, Black Stone vanished into thin air

Will it happen again this time and this october?

No! in FDIAt the macroeconomic level, it is not. At present we are just in the beginning of a bubble, the Startup bubble, it has a long way to go. And with this bubble burst India’s growth story will come to an end. So, the intensity of the crash will be pretty severe, more than what China is facing now. Whereas, before this crash happens, there is a wonderful opportunity available to make profits that can serve us for a couple of generations.

What is happening in our economy now, why are we having weakness?

There was a lot of expectation on the new government to deliver, which has not happened to the extent thought off. While, the ground work is seriously on. Some indications for strength that India has, have been seen in the recent developments.

Capital from the US and other developed economies are showing high interest to invest in India.

This week when Modi visited US along with Li Xinping and Nawaz Shariff, India has got the highest attention. Businessmen across the US have shown great interest to invest in India.

Facts show that India is attracting highest FDI among emerging markets. All of China’s losses have got added to India. When so much money is coming to India, it is obvious that there is going to be some phenomenal activity in our economy.

RBI has surprised with a twice the expected interest rate cut, which will begin to show up in the economy as the banks lower lending rates & industry begins to borrow and grow business. Due to the drop in interest rates, home buying will show an uptick, car sales will go up and many similar growth patterns can be seen.

Post China Currency issue and Volkswagen Scandal; it will take some time to show strength, it may take another 2 months, while the next biggest global growth story is going to be in India.

 

About Author

Ramesh Sigamani

Ramesh Sigamani

With over 3 decades of experience in capital market investments, Ramesh Sigamani is a trusted Financial Planner par excellence. He works personally with individuals and corporates to build a strong investment portfolio that stands firm against market volatilities and delivers time & time again.

Related posts

Market Crash 2018, how much more it will go?

Why this correction? Re-categorization by MF’s brings divergence between Mid Caps & Large Caps, closing in of the divergence with triggers from Currency depreciation, Crude Oil price increase along with IL&FS, DHFL debt crisis brings steep correction to the markets. How long it will last? We are close to...

Read More

Give a Reply