Year end gains

If you are looking for reasons pointing to the surge in equity markets and can’t find any, well then try an unconventional explanation.

Go back to history, if the last ten years data is to go by, the markets have posted positive returns, or in other words rallied in the last week of every year. Further, FII inflows have also been positive during the same period, contrary to popular belief that they usually stay away from the markets due to holiday season.

The gains in the last week of every year can be called a ‘Santa Claus rally’, though in Wall Street terminology. A Santa Claus rally refers to a jump in the prices of shares in the week between Christmas and New Year. In the US, there are several explanations for this phenomenon. Some of them relate to tax considerations, plain happiness around the street or also the fact that a lot of people are on vacation that week.

There are no definite explanations for such a situation in India but there has been a rise in the markets between Christmas and New Year every year since 1997. Data to study this phenomenon in India was available since 1997 only as prior to that the markets remain closed the week after Christmas.

The highest gains during the same period were posted by Sensex in 2003, which is 3.5%. Similarly, the highest net FII inflow also has been during the same year. However, data suggests that this not due to FII inflow alone as even though in 2006, the net FII position was negative, the markets gave a return of 2.3% during the same period. For the past four years, markets have gained handsomely during the same period, followed by strong FII inflows (expect 2006).

Even if we go by today's market movement, Sensex surged 3.6% to close at 19,854 points, which could be a precursor to the rally over the next few days. The provisional FII data stood at Rs 176 crores, according to NSE provisional figures. It is to be seen whether in percentage terms, Indian equity markets are able to see its best rally this time. In the same period last year, the Santa Claus rally raised the market by 2.3%.

Many analysts believe that the rise during such a period is more in anticipation of a strong performance in the early months of the new year as it is believed that there is always a lot of action in the period surrounding the budget. They also attribute this rise to beginning of the pre-budget rally.