Cash gusher: November song, Santa rally for bourses?

MUMBAI/SINGAPORE: Though it goes against tradition, of late, the Indian equity market has given the impression that November and December are good months for it.

According to traditional theory, fund managers from abroad book profits in November (meaning foreign institutional investors sell in India), lock their gains into index stocks in December, collect hefty bonuses and enter the markets actively in January.

This should ideally mean that the markets should end down in November, register marginal gains, if at all, in December, and then go on a run in January.

But data for the past five years indicate that November and December have been giving positive returns, with the exception of December 2001, when the Sensex ended down by a marginal 0.8%.

In fact, in the last seven years, the index has logged positive returns in November, and only on two occasions, closed down in December.

“If one were to look at October over the last 16 years, there are only five instances where it closed positive. But the fact remains that after each of these five times, November has also gone on to give positive returns. Historical evidence suggests that this November is going to be no different, considering that October had given a 4.1% return,” said V K Sharma, director and head of research at Anagram Securities.

So, the probability of December ending up is high, and the trading tip that can be given at this point is to buy December futures.

But don’t bet on this, as the markets are a function of sentiment more than anything else. And, therefore, if sentiment turns negative, there’s no guarantee.

Flows from FIIs, which have been driving and supporting the market, are also unpredictable.

One can only hazard a guess as to why flows from them have been exceptionally strong of late. They have bought a net $7.3 billion in 2006 so far.

The fact that there is a slowdown in the US economy could be one reason, with people preferring to park their money in countries where growth is far more certain. India has all the trappings of such an economy: GDP growth here depends on domestic consumption, corporate growth has been resilient, and there is a fair amount of tolerance to interest rates hikes.

Another factor that could have spurred the surge in FII inflows is the fresh number of FIIs registering with Sebi every day.

Since January this year, there has been an addition of 150 more FIIs. For many of them, this is an absolutely new country to park their money.

As far as Asian economies go, those that rely on exports could benefit from US consumer spending, which usually picks up in November and December.

The ‘Santa Claus effect’, as it may be called, doesn’t necessarily hold true for Indian companies, because they don’t count much on exports to the US.

The Morgan Stanley Capital International Emerging Market Asia Index is treading close to its all-time closing high of 350.94 points made on May 8, 2006. As on November 10, 2006, the index closed at 343.78 points.

In 2004 and 2005, Asian shares excluding those of Japan had their biggest two-month advance in November and December. This has been on anticipation that US consumers will buy more holiday gifts and foreign money will flow into the region.

Indices in Australia, Hong Kong, India, Indonesia, Singapore and Sri Lanka reached all-time highs last week.

“The US outlook has set the stage for a Santa Claus rally in Asia,” Chong Sze King, trading manager at Asia Genesis Asset Management in Singapore, which oversees about $300 million, told Bloomberg.

“Investors are buying in anticipation the markets this year will perform as they have historically.”

Hon Hai Precision Industry, the world’s biggest contract manufacturer of electronics, and Li & Fung Ltd, a supplier to Wal-Mart Stores and Target Corp, are among the companies benefiting from growing demand in the US, the largest buyer of Asian exports.

International investors have bought a net $117.8 million of stocks so far this month in six emerging markets in the region, data compiled by Bloomberg shows. They purchased more shares in Asian markets outside of Japan than they sold in November and December for the past four years, according to Citigroup Inc.

Sales at US stores will rise 5% in November and December, the National Retail Federation forecast on September 19. While the estimate trails last year’s 6.1%, it’s higher than the 10-year average of 4.6%. The holiday period accounts for a fifth of US retailers’ sales.

But the concern for Asia is valuations. Shares in Asia excluding Japan changed hands at 2.2 times book value at the start of November on average, Markus Rosgen, Citigroup’s chief Asian strategist in Hong Kong, told Bloomberg.

“We’ve seen a strong performance in Asian markets and the major caveat now is the valuation of stocks,” Rosgen said. “While there’s a little more room to rise, the seasonal rally this year might be more muted.”

With inputs from Bloomberg