Are domestic investors being set up for a January trap?

Sagar Salvi & Riken Mehta

Traditionally, December has turned out to be a good month for stock market bulls around the globe. Partly, it also has to do with fund managers making targeted purchases to shore up the net asset values (NAVs) of their schemes to earn a higher bonus. In India, market operators load up on shares in December, betting on increased allocation from foreign funds for India. But four times out of five since 2008, the gains made in December have not sustained in January. (See graph below)

The exception to the trend was in January 2012, when the market rose after a retreat in December.

“January has been a traumatic month; 2008 January onwards, every time the market peaks by January 8-9 and we see a slide down till the March Budget comes in. Historically, yes, you would like to book your profits around January 10-15 and stay and see what the Budget brings, but momentum is just too strong. We are talking of serious momentum in the system, which just overlooks everything which comes negative on the macro factor,” Ajay Srivastava, CEO of Dimensions Consulting told CNBC-TV18 in an interview.

Markets across the globe rallied in January this year, thanks to the wave of funds unleashed by the second round of Quantitative Easing (QE), this time in Europe.

Indian benchmarks have fared much better than expected in 2012 so far, with a good chunk of the gains coming since October, when the government announced some policy reforms. But it won’t be a easy road ahead for the bulls, as the market already appears to have discounted an improvement in corporate earnings and economic growth. At roughly 14-15 times forward earnings, the market is not exactly cheap, considering that earnings upgrades still appear some way off, fiscal and current account deficit still pose a big risk to sovereign rating, and the inflation is not showing any signs of cooling.

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