After a strong rally in October and November, the Indian benchmark indices have remained subdued so far in December. Both the Sensex 30 and Nifty 50 are down about 1.4 per cent this month. The Sensex had risen 5.8 per cent and 3.8 per cent in October and November, respectively, while the Nifty was up 5.4 and 4.1 per cent. The sell-off in US equities over concerns that the US Federal Reserve may continue to remain hawkish even if they slow down the pace of rate hikes, has been weighing on the Indian markets lately.

But history suggests that things can turn around if Santa Claus visits our markets; this has happened often in the past. Analysis of data over the last 30 years in December show that the Sensex has closed December in the green 73 per cent of time, while the Nifty 50 has ended December on a positive note 77 per cent of the time.

Why the rally

A ‘Santa Claus’ rally in markets can happen in two different ways. One is a rally that happens in the period leading to Christmas. The second is the rise that takes place after Christmas up to January 2. While the spending spree in the WestWestern world ahead of Christmas sparks the first type of rally, the second one is usually triggered by money managers trying to spruce up their returns for the calendar year-end. The week after Christmas is usually a quiet period for the financial markets, because trading volumes generally dip as market participants shut shop for the New Year.

So, for the purposes of this study, we have taken the full-month performance in December for major global equity indices. Dow Jones Industrial Average and S&P 500 from the US, DAX from Germany, Nikkei 225 and Shanghai Composite from Asia are the major indices considered for the comparative study.

India outperforms

The study shows that the Indian market tends to outperform its global peers in Santa Claus rallies. The Sensex and Nifty have ended the month of December in the green 73 and 77 per cent of the times, respectively.

Nikkei 225 and Shanghai Composite have ended in the green only in 63 and 47 per cent of the times. The performance of the US and German indices are almost the same. December has seen a positive close 70 per cent of the time for the Dow Jones and 77 per cent for the S&P 500 and DAX.

Indian benchmark indices have fared better on returns during the month too. On an average, the indicesSensex and Nifty have given over 3 per cent return in December over the 30-year span, whereas the Dow and S&P 500 are up by an average 1.2 per cent. Asia’s Nikkei 225 and Shanghai Composite have risen by 1.08 and 0.51 per cent on an average in December. DAX is relatively better than the Asian and US indices with an average return of 2.24 per cent.

Santa Claus rallies seem to have a sectoral bias. Fifteen-year data on the BSE sectoral indices shows that the BSE Metals, BSE Oil & Gas and the BSE Power indices have closed in the green for the month of December 80 per cent of the times. In terms of return, the BSE Realty index has been the best with an average return of 6.1 per cent in December in the last 15 years.

But there are event risks round the corner. The US Fed’sFederal Reserve’s last meeting for the year is scheduled on Wednesday, December 14. The market has already factored in a 50-basis points rate hike but anything further could ruin it for a Santa Claus rally.

Anupam Guha, Head – Private Wealth Management, ICICI Securities says, “Market participants are not expecting rates to go beyond 5 per cent next year due to impending recessionary fears. The market could be looking for some dovish comments with respect to early pause of the rate hike cycle. Nifty can endure its northbound journey and head towards 18,900 in December,”, he adds.

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