Will the markets see Santa Claus rally this December?

In the past 10 years, since 2011, markets have delivered a positive return in 5 out of 10 occasions with gains for the S&P BSE Sensex ranging between 0.4 per cent to 8.2 per cent.

There has been a stellar rise for the Indian markets this far in calendar year 2021 (CY21) with the S&P BSE Sensex surging over 19 per cent.

The gain in mid-and small-cap indices on the BSE has been sharper with both these indexes surging around 38 per cent and 54 per cent, respectively during this period.

Rampant spread of Covid pandemic’s Delta variant and the ensuing lockdown and mobility curbs across India, rising prices key commodities, including crude oil and its impact on inflation, possibility of tightening of policy stance by major global central banks, especially the US Federal Reserve (US Fed) have been some of the key headwinds that the markets successfully negotiated during this period.

So what does December hold in store?

Will the markets see a ‘Santa Claus’ rally this time around?

Many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect.

In the past 10 years (since 2011), markets have delivered a positive return in 5 out of 10 occasions with gains for the S&P BSE Sensex ranging between 0.4 per cent to 8.2 per cent, data shows.

While analysts agree that the outlook for equities as an asset class remains strong and the valuation of the Indian market has become reasonable after the recent sharp correction, the markets may not see a runaway rally from here on, at least in the near–term.

A lot, they say, would depend on the rate hike path of the US Fed and the Reserve Bank of India (RBI), developments regarding the Omicron Covid variant.

In this backdrop, analysts expect the Indian markets to consolidate the gains made thus far in CY21.

The return from here on, they believe, will be guided by corporate earnings growth besides other factors.

Robust macro fundamentals with India expected to be the fastest-growing economy over FY22-23 as per IMF estimates, strong external sector with a current account surplus on trailing twelve month basis and forex reserves of $640 billion, CPI inflation below the upper limit of 6 per cent, stable rupee, and improving tax buoyancy are some of the factors that will keep the interest of investors alive in the Indian equity markets.

“We expect earnings to be the key driver of equity returns in 2022. In line with our earnings expectations, we expect high single-digit equity returns in 2022 compared to double-digit returns in 2021.

"Other tailwinds for this asset class going forward include the ongoing economic recovery, and the 'there is no alternative' (TINA) argument for equities,” said analysts at Credit Suisse in a recent note.

That apart, primary market activity is another factor that will have a bearing on the secondary market liquidity and how indices perform.

After a blockbuster November that saw heavyweights such as Paytm garner over Rs 18,000 crore from the primary market, as many as 16 issues cumulatively worth over Rs 22,000 crore are expected to hit the market in December, reports suggest.

Indian firms have already surpassed the record for IPO volumes this year, with around Rs 1.16 trillion raised so far in CY21.

“Since the current bull-run started from the bottom in March 2020, Indian equities have paused five times (Apr’20, Aug’20, Oct’20, Feb’21 and now since Oct’21) for brief corrections before resuming the subsequent up move.

"The current phase of correction is another such pause or consolidation before the next surge begins,” said Vinod Karki, equity strategist at ICICI Securities.

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