December’s reputation of being the most favourable month for Indian equities may remain intact this year too. Statistics support such an outcome, but what is making investors more confident about the possibility of the market posting gains in December is the relief that the government is on a stronger footing politically and hopes of a pick-up in domestic investor activity.
The government’s agreement for a vote on foreign direct investment in retail in the Parliament has been perceived by investors that it has it has the numbers to beat opposition’s demands for the policy to be rolled back.
“Prime facie, it looks like the markets are likely to clock gains in December because the government seems to have managed to get the numbers for retail FDI,” said Tirthankar Patnaik, director and strategist, Religare Capital Markets.
In the last 33 years, the average stock returns in December have been 3.6% compared with average 1.8% during the other months, according to a Religare study.
This data also contradicts a popular perception that higher foreign institutional investor (FII) participation drives to higher returns. In fact, December receives 25% lesser FII inflows than the other months. This is because most FIIs in developed countries are out of action over the three to four weeks starting mid-December on account of Christmas and New Year holidays.
In their absence, local market operators and traders jump into the fray and drive the markets. Brokers said December has been a strong month for Indian markets because local investors buy stocks on the notion that foreign institutional investors (FIIs), armed with fresh allocation mandates in the new-year, purchase afresh in January.
But, the question is whether local investors, who have been mostly inactive during the year, return to the markets just in December.
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“That’s unlikely as there are no positive triggers,” said Nirmal Jain, chairman of Mumbai-based broker IIFL. “But, the market will end with gains as worries about the government falling have receded and the possibility that no major reforms will be passed has been factored in.”
Brokers said the approval to set up the National Investment Board to cut the bottle necks to clear investments faster will boost the market.
But, there are factors that can scuttle the optimism during the month. The declining rupee is the biggest threat to a positive ending to the market in December, said Religare’s Patnaik.
“A weak rupee does not bode well for the market as the rupee and Sensex tends to move in tandem,” he said.
The uncertainty surrounding the onset of the so-called fiscal cliff in the US on January 01 is also unnerving investors. The fiscal cliff is the confluence of three separate legal events including expiration of a temporary payroll tax cut, expiration of the income and estate tax cuts and mandatory spending cuts. But, remarks from US authorities that they are trying to avoid the looming fiscal cliff has alleviated concerns.