Will the markets see a Santa Claus rally this December?

Since 2003, in 10 out of 11 years the benchmark indices have given positive returns in December, except in CY2011.

The year 2014 has been one of the best for investors in the equity markets, with the benchmark indices — the S&P BSE Sensex and the CNX Nifty — moving up 34 per cent and 35 per cent, respectively.

Among sectors, consumer durables, capital goods, automobiles and health care have been the top performers, with their respective indices gaining between 52 and 71 per cent in 2014.

Factors, both global (such as the fall in crude oil prices, quantitative-easing measures in Japan) and domestic (decisive electoral mandate for a new government at the Centre, positive policy measures, inflation and rupee trajectory) have fuelled the market rally over the past few months.

The latter has seen the total market capitalisation of the listed firms on the BSE hit Rs 100 lakh crore for the first time.

With the markets already at record levels, is there room for more upside in the near term, especially in December that has traditionally been good for equities? Since 2003, in 10 of 11 years, the benchmark indices have given positive returns in December, except in 2011, data suggest.

Foreign institutional investors (FIIs) made a net investment of over $1 billion in three out of five occasions, when the S&P BSE Sensex rallied over five per cent.

So will the markets see a Santa Claus rally this time round? A Santa Claus rally is a rise in stock prices in December, when investors buy stocks in anticipation of a rally during January, also known as the January effect. 

While analysts agree the outlook for equities as an asset class remains strong, the markets might not see a runaway rally from here on in the near term and the coming Budget in February remains a key trigger. There are chances that investors book some profits ahead of the Budget, they caution.

U R Bhat, managing director, Dalton Capital Advisors, says: "The markets have seen a healthy run-up since February on expectations that there will be a change of guard at the Centre after the general elections. Against this backdrop, it appears difficult for the markets to run up dramatically from here on."

"The next big event that the markets are eyeing is the Budget in February. So for investors who have made money may like to book profits at some stage and take a fresh investment decision in late January or February. Markets can, in fact, correct five-seven per cent over the next two months," he adds.

Others like Andrew Holland, chief executive, Ambit Investment Advisors, believe  the Nifty can hit the 9,000 mark (up five per cent from current levels) by February when the Budget gets tabled.

While favouring cyclical sectors, he does not advocate a strategy wherein investors sell now and buy again around the Budget.

Ravi Sundar Muthukrishnan of ICICI Securities, in a report report co-authored with Vinod Karki and Ravin Kurwa, suggests that the markets can consolidate in December 2014 post the approximate 10 per cent rally since mid-October 2014.

Productivity of winter session of Parliament, CAD (current account deficit) numbers for Q2FY15 and institutional flows given the volatility in the last two months are the events that can alter market's trajectory in December 2014, they say.