Will the markets see a Santa Claus rally in December?

Markets have spent most of calendar year 2015 (CY15) in consolidation mode after surging over 30% in the previous year. Till November 30, the S&P BSE Sensex and the Nifty 50 indices lost around 5% each and have remained mostly flat during the first two trading sessions in December.

By comparison, frontline global benchmark indices in indices in Argentina, France, Nikkei, China and the S&P 500 have logged gains thus far in CY15 - rallying 1% to 51% during this period. On the other hand, frontline benchmarks in Hong Kong, Sri Lanka, Brazil, Taiwan, Jakarta and Singapore have fared worse than India - falling 5.3% to 15.1% till November 30.

After hitting record high levels in March 2015, concerns relating to China, a slowdown in global growth, fears of Greece exiting the Eurozone, the impending rate hike by the US Federal Reserve, slower-than-expected growth in corporate profits, Parliament logjam were some of the factors that dented market sentiment in CY15.

So what does December hold in store? Will the markets witness a 'Santa Claus rally' in this time around, especially at a time when the US Federal Reserve could hike key interest rates for the first time in nearly a decade?

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.

Traditionally, December has traditionally been good for equities. Since 2005, in 8 out of 10 years (except in CY11 and CY14) the benchmark indices have given positive return in December, data suggests.

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 and a lot would depend on the outcome of the upcoming US Fed meeting and its outlook on the trajectory for future rate hikes.

"Usually what happens in second-half of December is that the foreign institutional investors (FIIs) go on a holiday. As a result, there is a reduction in volumes and there is frantic activity in the mid-and small-cap segments. I don't think the case will be any different this time as well and we will see the mid-and small-cap segments perform relatively better, at least in this month. This has been the trend since the past few years and it is likely to continue this year as well," says Vaibhav Sanghavi, managing director, Ambit Investment Advisors.

As regards the large-caps and the frontline benchmark indices, analysts say that besides the outcome of the US Fed, the investors will eye the outcome of the European Central Bank (ECB) meeting and the ongoing Parliament session in India for status of key policies.

"There is an expectation that the ECB may increase stimulus, which will have a bearing on how the markets play out going ahead. Besides the US Fed meeting outcome, what business gets done in the Parliament is also a key variable that the markets will keenly monitor in the short-term. We think that post the rate decision by the US Fed, there will be some stability in FII flow into the emerging markets. Broadly, the market should trend higher over the next three months," Sanghavi adds.

U R Bhat, managing director, Dalton Capital Advisors, however, feels that the markets are unlikely to see a runaway rally from hereon. Nifty, he says, will remain range-bound between 7,500 and 8,250 and suggests investors utilise dips to add on to positions from a medium-term perspective.