November Rain: Will it be Trick or Treat after Halloween for equity markets?

• Will the Halloween effect lift markets after a bloody October? Technicals show that only on five occasions out of ten have markets delivered positive returns in November.
• Sector rotation is likely to play out in November, as valuations of large caps look far more attractive after October’s bloodbath.
• Last year, the Nifty returned nearly 4% in November but it had declined in 2021.
  

Markets love magic as much as the rest of us mortals. Call it seasonality or just hearsay, but markets do tend to behave in a certain way during different months of the year. Every year, financial publications cite the term ‘Sell and May and Go Away’ to foretell selloff in stocks and then wait for the Halloween Effect to kick in by November, when investors come back to bulk up on stocks.

The Halloween Effect is nothing but an indicator that equity markets deliver returns between November and April more than they do between May and October. So the question is whether the Halloween Effect will kick in this year too.

History shows that over the last ten years, markets have delivered positive returns five out of these ten times. October as per trend has been a bloody month for equities after it achieved the milestone of 20K in September 2023. The Nifty50 clocked the deepest month-on-month decline of the year in October at 2.8%. The index oscillated 1,012 points before closing 559 points lower at 19,080.

Last year, the Nifty returned nearly 4% in November but it had declined in 2021. According to analysis done by JM Financial’s technical research team, Nifty has shown relatively average seasonality. On an average the Nifty’s returns have been 1.2% during the month of November.

The Nifty midcap Index on the other hand has shown greater seasonality during the month of November with the index closing in the green on 8 out of the 10 occasions with an average return of 2.1%. And on seven occasions, the midcap index has outperformed the benchmark.

October was a bad month for equities as the world was rocked by the escalation in tensions between Israel and Palestine. Foreign investors have consistently sold Indian equities for two months now, even if the outflows were offset by stronger domestic money. According to Motilal Oswal Securities, domestic institutional investors in October recorded the highest inflows in the last seven months at $3.4 billion, while foreign institutions clocked outflows for the second consecutive month at $2.7 billion. All major sectors ended lower during the month with metal, PSU banks and telecom declined by 6%, while utilities fell 5% and healthcare by 5% too. Real estate stocks beat the trend and closed in the green.

If seasonality is any indicator then JM Financial’s research shows that the real estate sector may be a winner in November too along with Bank Nifty and media. In November, pharma stocks tend not to do so well. Bank Nifty and Real Estate stocks have outperformed the Nifty50 on eight occasions with an average outperformance of 2.4% and 1.1% respectively. Energy is another sector that has underperformed the Nifty50 on seven occasions out of ten during November. In addition to the technical insights, fundamentals of some sectors are also improving with banking, auto, healthcare and select large-cap IT stocks trading at attractive valuations.

Globally too October was not a great month for equities. All major economies ended lower in October: Barring Russia (which was up 3% MoM), October saw key global markets such as Korea (-8%), MSCI EM (-4%), the UK (-4%), Japan (-3%), China (-3%), Brazil (-3%), India (-3%), Indonesia (-3%), the US (-2%), and Taiwan (-2%) close lower in local currency terms, says Motilal Oswal.

Over the last 12 months, the MSCI EM index (+8%) has outperformed the MSCI India Index (+4%). Over the last 10 years, the MSCI India Index has notably outperformed the MSCI EM index by 178%.

According to analysts, corporate earnings are so far not showing any deviation. Corporate earnings so far have been in line with the performance of heavyweights such as BPCL, HDFC Bank, JSW Steel, Reliance Industries and ICICI Bank, driving the overall performance.

According to Motilal Oswal’s analysts, “With the earnings outlook for Nifty and the broader MOFSL Universe remaining healthy and valuations of several sectors being at a premium to their long-period averages (Industrials, Consumer Discretionary, Mid-Caps and Small-Caps), we expect the sector rotation in Indian equities to continue. There are significant divergences in performance of large-caps vs. mid-/small-caps and across sectors. We believe that in the midst of volatility over the next couple of quarters, sector rotation could be a more important driver than the general market uptrend.”