Markets close higher for fourth straight day; is a Santa Claus rally on the cards?

The Indian market has shown resilience in the last few weeks of November and then the first few days of December. The market has bounced back sharply from the November lows. NIFTY50 has jumped nearly 1,200 points from the recent lows of 23,263, gaining 5.5% from the low levels. Similarly, the SENSEX, too, clawed back nearly 6% from the November lows of 76,802.

The pullback from lower levels has sparked hopes for market participants that the rally will continue until the end of 2024. This could also make it a Santa Claus rally, showing a melt-up-like situation in the Indian markets.

How NIFTY50 performed in December between 2019 and 2023

(Source: NSE data)

In the last five years, NIFTY50 has closed in positive territory three times in December, with December 2023 leading with 7.94% gains, followed by 2020 with 7.8% gains and 0.93% in 2019. In the years 2021 and 2022, NIFTY50 fell 2.2% and 3.4% in December, respectively.

FII buying back into Indian markets

Foreign institutional investors, who play a crucial role in the Indian market, have recently shown significance in the market by selling over ₹1.5 lakh crore in two months.

The ownership of FIIs in Indian equity has gone down to 18% in FY24 and a little lower than that in H1FY25. The ownership share has been the lowest in 11 years. However, India remains a bright spot in the global economic scenario.

The persistent rate cuts in the US and the strong liquidity appetite of Indian investors have made domestic markets more attractive. The recent correction from the top also provides ample opportunities for FIIs to come back with a bigger share. FIIs also bought ₹3,664 crore on December 3 after a brief selling in November and October.

Government capex picking up

2024 was the year of the election. Thus, the ruling government went slow on capital expenditures in H2 of FY24 and H1 of FY25. However, now that things have settled down and policy formation and implementation have picked up, the government's capital expenditures are also expected to accelerate further.

This can be seen in recent developments where the government prepares for major schemes for different segments.

The government will likely announce a ₹40,000 crore scheme for electronic components manufacturers, replacing earlier schemes. The central government also plans to boost battery manufacturing and may roll out a scheme worth ₹9,000 crore for battery component manufacturers. On Wednesday, December 4, the Defence Acquisition Council (DAC), under Defence Minister Rajnath Singh's chairmanship, approved five capital acquisition proposals worth more than ₹21,772 crore.

The central government's strong capex could also encourage private investment to match the supply, as India Inc. is light on the balance sheet.

Change of stance by RBI

Central banks across the globe are on a spree to cut interest rates at a faster pace. The US Federal Reserve has cut interest rates twice in recent policy meetings. In line with the Federal Reserve, many European central banks have also pushed liquidity by cutting interest rates as the inflation scenario remains largely controlled.

The Reserve Bank of India has been prudent in raising interest rates before its Western counterparts to tackle the rising inflation problem. However, inflation in India remained volatile for the past three quarters, rising back above 6% levels, largely due to higher food prices.

Meanwhile, the poor earnings growth and the slowdown in GDP numbers show that RBI may change its stance in upcoming policy meetings starting in February 2025.

A dovish commentary by the RBI governor could boost animal spirits in the economy, prompting a major uptick in credit growth, which recently slowed down to 11% in Q2FY25 from the peak of 15% in FY24.

Reasonable valuations

The recent correction in the market from record highs has removed the excesses, making it reasonable in terms of the actual fundamental valuation. NIFTY50's current PE stands at 22x the earnings, much lower than the 24.38x in September 2024.

Similarly, the broader NIFTY500 PE has also corrected from the peak of 28x in September to 24.7x in November and 26x in December.

The correction in valuation allows smarter, long-term investors to enter markets with large exposure. The festive season showed strong sales numbers, with GST collections rising 8% YoY, indicating a pick-up in economic activity, which will be reflected in the earnings in the coming quarters.

Trade war tensions

Despite the multiple positive factors, some risks to this rally could come from the US. Donald Trump, the newly elected president of the United States of America, is expected to be harsh on global trade, as he plans to impose tariffs on all countries, which could adversely impact India’s growth story.

The recent threat to BRICS nations of forming a separate currency to counter the US dollar has created a buzz among diplomatic circles around the globe. Rising trade war tensions could turn investor sentiment more cautious than optimistic.

Geopolitical risks

Lastly, the geopolitical risks weigh down more on the market's stability than ever before. The heated conversation between Russia and Western countries over Ukraine has increased the risks of nuclear war. Besides, Donald Trump has indicated his stance of ending the war when he resumes office, giving some hope of peace and stability in the region. However, any escalation between Russia and Ukraine might dampen investor sentiment.

It would be too early to term the current market rally as the Santa Claus rally, as we are in the early days of December. However, multiple factors fall in the favour of a sustained rally in the markets.