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Superstition and investing normally don’t mix… unless you live in Asia.
It’s the only place where you’ll hear and read “well respected experts” making predictions about the stock market based on astrological signs and feng shui (the ancient Chinese practice dealing with the relationship between humans, the elements and the universe).
That includes personalised investment advice like avoid investing in tobacco stocks if you were born in the year of the Fire Dragon – because too much fire will create an imbalance.
Whether or not people actually follow this advice is a different matter. I’ve yet to meet someone who’s made money because they blindly followed their feng shui master’s prognostication. But superstition clearly has a big impact on the sentiment and decisions of many investors throughout Asia.
Beware the Ghost Month
Every August, hundreds of millions of Buddhists and Taoists in Asia observe what’s commonly called the Ghost Month – the seventh month in the Chinese Lunar Calendar (which is very different from the Gregorian calendar most people normally follow).
Sometimes, Ghost Month will start in early August and end just before August finishes. Other times, like this year, it starts in the second week of August and ends in the second week of September.
The belief is that during this time of the year, ghosts and spirits roam the physical realm (i.e., Earth). Chinese families prepare ritualistic food offerings and burn paper money to pay homage to deceased relatives. They also avoid making any significant decisions, for fear of bad luck.
For example, you will almost never see a traditional Chinese wedding happen during Ghost Month. You also won’t see many Chinese start a new business venture, buy a new house or car or get an operation (unless it’s an emergency).
We previously wrote about an old stock market adage “sell in May and go away.” Ghost Month also has an effect on the stock market. For example, in Hong Kong, the number of initial public offerings (IPOs) drop to their lowest levels of the year during Ghost Month.
As you can see, there’s a sharp falloff in the number of companies looking to list their shares each August.
It’s not that the CEOs of these companies fear that listing their shares on the stock exchange in August will bring them bad luck and misfortune.
It’s just a common-sense reaction to Chinese investor sentiment in Hong Kong turning generally negative during this period. When the Chinese aren’t in the mood for investing, it makes sense to not try to list shares during Ghost Month.
Stocks perform better after
We looked at historical data for Asia’s major markets over the last nine years. As you can see in the following table, during August and September, Asian markets have performed poorly on average.
But the markets recover sharply over the following three months, as Chinese investors return to the market.
For example, China’s Shanghai Composite Index fell by 2.8 percent on average during the Ghost Month period. But it gained an average of 8.5 percent over the final three months of the year.
Meanwhile, Hong Kong’s Hang Seng Index has an average loss of 1.7 percent during the Ghost Month period. But it saw a 4.1 percent average gain during the remainder of the year.
Singapore and Taiwan, both predominantly Chinese nations, have seen the same polarity in the performance between these two periods. So has Malaysia, which has significant Chinese wealth flowing through its economy.
But it’s important to note that this is a limited amount of data. And there have been years when the markets performed better during August and September compared to later in the year. So this isn’t a reliable gauge for market returns going forward.
Editor, Stansberry Churchouse Research