After a choppy CY18 so far, will markets see Santa Claus rally in December?

It has been a choppy calendar year 2018 (CY18) thus far for the markets. The S&P BSE Sensex has moved up nearly 6 per cent on a year-to-date basis after a stellar rise of 28 per cent in CY17.

Confusion over long-term capital gains tax in the Budget, rate hikes by the US Federal Reserve, trade war fears, wobbly FII and mutual fund flows in the equity segment, spiralling crude oil prices, pressure on macros (fiscal and current accounts), fall in rupee and the crisis in the bank and non-bank finance segments were among the key factors that impacted sentiment in CY18.

So what does December hold in store? Will the markets witness a ‘Santa Claus rally’ this time around? 

Many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect.

Since the past 10 years (since 2008), markets have delivered positive returns in six out of 10 occasions, data shows. In the last four years (since 2014), however, they have slipped thrice.

While analysts agree outlook for equities as an asset class remains strong, the markets may not see a runaway rally from here on in the near – term. A lot, they say, would depend on the rate hike path of the US Fed and the Reserve Bank of India (RBI), the outcome of the assembly elections in India, due on December 11, and the G20 summit.

“The state poll outcome is important. If the outcome favours the current dispensation at the Centre, we can see a sharp reaction to the upside, which can get sold into. The markets are likely to remain range-bound in December. The upside for the Nifty 50 index is capped at 11,000 levels for now. The index has support at 10,000, which should not be breached in case of an adverse state poll outcome,” says U R Bhat, managing director, Dalton Capital Advisors.

Jayant Manglik, president at Religare Broking expects the markets to remain choppy in the tear-term given the number of crucial events lined up in coming weeks. 

"On the domestic front, GDP data for the second quarter, RBI monetary policy and the upcoming state elections results would be keenly watched. Globally, concerns regarding US-China trade war is likely to keep investors on the edge till any positive outcome in the upcoming G-20 summit. Though falling crude oil prices and appreciation in the rupee is encouraging, we remain cautiously optimistic in the near term," he says.

INVESTMENT STRATEGY

As an investment strategy, Vaibhav Sanghavi, co–chief executive officer at Avendus Capital suggests investors stick to the large-caps and move to the other segments once the market uncertainty clears.

“December is full of events that will keep the markets on the edge. There can be sharp movements on either side and predicting levels is hazardous. That said, a good way to navigate through these events is to stick to the large-caps and venture into other segments once there is clarity on the overall market direction,” he says. 

As regards the US Fed and the RBI, analysts expect both the central banks to hold rates in the upcoming policy review in December. The US central bank, they say, is expected to deliver fewer hikes in CY19.

“While the December projections may ‘lose’ a hike, the FOMC likely intends to deliver several hikes before taking a pause. However, that we are getting closer to a pause has been made clear. We also think that the US Fed will deliver fewer hikes than they now anticipate, even if they have become more dovish,” wrote Philip Marey, a senior US strategist at Rabobank International in a recent report.

Data compiled by BS Research *month on month change %