Santa may not come bearing gifts this December

Experts say stock markets are likely to consolidate gains made thus far in CY21

The Indian stock markets have witnessed a stellar rise 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 still with these indices surging around 38 per cent and 54 per cent, respectively.

The rampant spread of the Delta variant of the coronavirus and the ensuing lockdown and mobility curbs in India, rising prices key commodities, including crude oil and its impact on inflation, and the possibility of policy tightening by major global central banks, especially the US Federal Reserve (US Fed), have been key headwinds that the markets successfully negotiated.

So, what does December hold in store? Will the markets see a ‘Santa Claus’ rally? Many consider such a rally a result of people buying stocks in anticipation of the rise in stock prices in January, otherwise known as the January effect.

In the past 10 years (since 2011), markets have delivered positive returns on 5 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 remains strong and the valuation of the Indian market has become reasonable after the recent correction, the markets may not see a runaway rally from here on, at least in the near term. A lot, they say, will depend on the rate hike path of the US Fed and the Reserve Bank of India (RBI) and developments surrounding the Omicron 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, besides other factors. Robust macro fundamentals, with India expected to be the fastest-growing economy over FY22-23 according to the IMF, strong external sector with a current account surplus on trailing 12 months basis, forex reserves of $640 billion, CPI inflation below the upper limit of 6 per cent, stable rupee, and improving tax buoyancy are some factors that will keep investors’ interest alive in Indian 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 doubledigit 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 will have a bearing on secondary market liquidity and how indices perform. After a blockbuster November that saw heavyweights such as Paytm garner over ~18,000 crore from the primary market, as many as 16 issues cumulatively worth over ~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 ~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 (April 20, August 20, October 20, February 21 and October 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.