December's reputation of being the most favourable month for Indian equities might remain intact this year, too. What is making investors more confident is the belief that the government is on a stronger footing politically. There is also hope of a pick-up in domestic investor activity.
The government's agreement for a vote in Parliament on foreign direct investment (FDI) in the retail sector has been perceived as having the numbers to beat the opposition parties' demands for the policy to be rolled back. "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 past 33 years, the average stock return in December has been 3.6 per cent, compared with the 1.8 per cent average during the other months, according to a Religare study.
This data also contradicts a popular perception that higher foreign institutional investor (FII) participation drives higher returns. December gets 25 per cent 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 the Christmas and New Year holidays.
In their absence, local market operators and traders jump in and drive the markets. Brokers said December has been a strong month for Indian markets because local investors buy stocks on the notion that FIIs, armed with fresh allocation mandates in the new year, purchase afresh in January.
But, the question is whether local investors, mostly inactive during the year, return to the markets only in December. "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 for establishing a powerful National Investment Board, to cut the bottlenecks in clearing investments quickly, would boost the market.
However, there are factors that can scuttle the optimism during the month. A 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, as the rupee and the Sensex tend to move in tandem," he said.
The uncertainty surrounding onset of the so-called fiscal cliff in the US on January 1 is also unnerving some investors. The fiscal cliff is the confluence of three separate legal events - expiration of a temporary payroll tax cut, and of income and estate tax cuts, coupled with mandatory spending cuts. But remarks from US authorities that they were trying to avoid the looming cliff had also alleviated the concerns.