After experiencing a significant drop of over 10% in the benchmark indices, the stock markets seem poised for a “Santa Claus rally” this December. Several factors like increased government spending, attractive valuations, and renewed interest from foreign investors are boosting confidence among market participants.
Market Recovery and Recent Trends
The Indian stock market has shown impressive resilience in the past few weeks. Both the NIFTY50 and SENSEX indices have recovered strongly from their November lows.
- NIFTY50: Rebounded nearly 1,200 points, a 5.5% gain from its recent low of 23,263.
- SENSEX: Climbed back by approximately 6% from its November low of 76,802.
This recovery has sparked optimism, with many investors hopeful that the upward trend will continue into 2024.
December’s Historical Performance
Looking at the last five years, the NIFTY50 has closed in the green three times during December:
December 2023 was particularly strong, delivering a 7.94% gain—the highest among the past five years.
Recent Market Challenges
The past month and a half have been turbulent for the markets. Both Sensex and NIFTY50 hit a five-month low last week, falling 10% from their all-time highs in September. Experts describe this as the market entering “correction mode.”
Foreign Portfolio Investors’ Selling Spree
A significant factor behind this decline has been the change in sentiment among foreign portfolio investors (FPIs):
- In October, FPIs sold Indian stocks worth a record ₹94,000 crore. This was largely seen as a shift towards China, with Indian companies reporting weak results in the July-September quarter (Q2 FY2024-25).
- The re-election of Donald Trump as U.S. President has further affected the market. His promises of tax cuts for American companies and potential import barriers on goods from countries like India have added to FPIs’ cautious approach.
- In November so far, FPIs have sold another ₹22,420 crore worth of stocks.
Domestic Investors Hold Steady
Interestingly, domestic retail investors have remained calm during this market turmoil. Instead of panicking, they have “bought the dip” to reduce their average holding costs:
- Domestic investors invested nearly ₹42,000 crore in equity mutual funds in October—a record high.
- Systematic Investment Plans (SIPs) reached a new peak of ₹25,000 crore.
Market Outlook
The NIFTY50 is currently at 23,532.7 points. According to Deepak Jasani from HDFC Securities, it may stay in the 23,338-24,099 range this week. There’s hope for a recovery, but whether it’s a sustained rally or a brief rebound (known as a “dead cat bounce”) remains uncertain.
Challenges Ahead
Key challenges include:
- U.S. Policy Changes: The new U.S. administration’s stance on trade and taxes will impact global markets.
- Domestic Economic Trends: The second half of FY2024-25 needs stronger government spending, better urban consumption, and a good harvest season to boost growth.
- Valuation Concerns: Broader indices like NSE Midcap 100 remain expensive despite a 10% correction.
Motilal Oswal Financial Services has lowered full-year earnings growth expectations for NIFTY to 5%, the lowest since 2019-20.
Silver Linings for Investors
Higher Returns from Bank Deposits
With retail inflation hitting 6.2% last month, the Reserve Bank of India is unlikely to cut interest rates before early 2025. This gives savers an opportunity to lock in higher returns from bank deposits:
- There has been a noticeable shift of savings back into bank deposits. For example, in the fortnight ending November 1, deposits rose by ₹2.35 lakh crore, compared to a decline of ₹1.12 lakh crore in the previous fortnight.
Government Spending Revival
A pickup in government spending, along with improving rural demand, could support corporate earnings in the coming months.
Conclusion
While the current market scenario is challenging, there are clear signs of resilience and opportunity. Retail investors should remain calm and use this time to diversify their portfolios. With higher deposit rates and government spending on the rise, the broader economic outlook remains cautiously optimistic.
