May among the worst months ever

May 2004 has been one of the worst months in the history of Indian capital markets with BSE Sensex declining by 16 per cent during the month. Incidentally, this was only for the third time since 1990 that the index has fallen by over 15 per cent.

According to Motilal Oswal, chairman and managing director, Motilal Oswal Securities, there have been 16 times in last 14 years that the Sensex has fallen by over 10 per cent in a month.

The highest fall was in May 1992 when the Sensex fell by 23 per cent during the month (recovering by 2 per cent in subsequent month). May 2004 is the second biggest fall since then.

In 9 out of these 16 times, the index has given positive return in the subsequent month. The highest positive return (in the subsequent month) was 19 per cent in April 1999 (after a fall of 11 per cent in March 1999).

More importantly, there were only six instances in the past when the index had fallen by over 10 per cent at a trailing PER of less than 16x.

In five of these six times, index has given positive returns in the following month. Following one of the best years in the history of India Inc, the BSE Sensex is currently trading at a trailing PER of 15.5x.

However, brokers are not overly worried about the situation. "Although the future course of market behaviour may depend on the movement of funds and the 2004-05 budget (expected only in July), we feel that risk-reward equation is favourable for long term investors at the current levels," said Motilal Oswal.