Will December see a Santa Claus rally?

Markets have struggled to cling on to higher levels and have corrected nearly 4% from their November highs, largely on concerns that the US Federal Reserve (US Fed) will start tapering the $85-billion-a-month bond-buying programme.

The benchmark indices – S&P BSE Sensex has shed 704 points to 20,535 levels, while the CNX Nifty has dipped 225 points in past four weeks to 6,100 levels. On November 3, the BSE’s 30-share bellwether index closed all-time record high, while the 50-share Nifty closed at an all-time high level since 5 November 2010.

Among sectors, consumer durables, oil and gas, bankex and fast moving consumer goods have been the worst hit, falling between four – nine%, as against 3.3% declined in S&P BSE Sensex.

After declining nearly 700-points from the top, will the equity markets bounce back and witness a foreign institutional investor (FII) fuelled Santa Claus rally in December?

According to data compiled by the Business Standard Research Bureau, December month has historically been favourable to stock markets. In past one decade, in nine out of 10 years, the benchmark indices had given positive returns, except in calendar year 2012. The FIIs had made net investments of over $1 billion in three out of five occasions, when the Sensex rallied over five%.

A glimpse of into the rollover stats for the November futures and options (F&O) series suggests around 66% Nifty-wide rollover. This is in-line with the last series and most capital goods stocks, especially BHEL, are seeing a healthy rollover, according to Chandan Taparia, Derivative Analyst, Anand Rathi Financial Services.

Adds Sahaj Agrawal, Deputy Vice President- Derivatives Research, Kotak Securities: “Rollovers remain strong in the index indicating continuation of up-move. We are seeing very strong support for the Nifty at 5,900–5,950 and suggest buying on dips.”

Event-driven rally

December is packed with key economic and political events, both at the domestic and the global level, which will decide how foreign institutional investors (FIIs) fine tune their investment strategies.

“US unemployment data in the first week of December will give us cues on what the US Federal Reserve (US Fed) may do in terms of tapering of the bond buying programme. On the domestic front, we will know the outcome of the Assembly elections in India on December 08. Both these events will impact how the flows and the equity markets pan out for the rest of the month, and beyond. Overall, I don’t expect huge outflows. Narendra Modi-led BJP win in the Assembly polls will be seen as a positive by the market participants in the very short-term,” says Andrew Holland, CEO, Ambit Investment Advisors.

Besides these two key events, Mehraboon Irani, Principal and Head (Priority Client Group), Nirmal Bang Securities suggests that the markets will also be eyeing Reserve Bank of India’s (RBI’s) stance regarding key rates.

“As regards the Assembly polls, the markets are discounting the fact that Bharatiya Janata Party (BJP) will win three out of four states – Rajasthan, Madhya Pradesh and Delhi. In case there is a setback, the markets could fall and we can see outflows as well. A level of 6,300 (Nifty) is not ruled out in case of a favourable verdict. On the lower side, it can fall to 5,900 if the election verdict is not as per market expectation,” he adds.

Gopal Agrawal, chief investment officer, Mirae Asset Global Investments (India) expects high beta sectors to get incrementally higher flows going ahead.