US inflation is slowing, which encourages a Santa Clause rally.

The expectation of a Santa Claus rally throughout the world, including in India, has now increased as a result of a US inflation figure that came in below experts’ predictions. Tuesday night, US government statistics revealed that consumer inflation for November was 7.1%, lower than the average forecast of 7.3% and 7.7% in October. The statistic improved investor mood, which caused the Nasdaq Composite to rise by 2.5%, the Dow Jones index to rise by over 1%, and the  Nifty, a derivative of India’s Nifty index traded on the Singapore exchange, to rise by about 1%. A Santa Claus rally is the term commonly used to describe a stock market rise before Christmas.Santa Claus rally' for stocks is likely this year -- but you won't be opening presents until after Christmas - MarketWatch

Investors have breathed a sigh of relief as the US CPI for November came in below both the consensus estimate and the prior reading, according to Apurva Sheth, Head of Markets Perspective & Research, Samco Securities. This puts us closer to the US Fed’s true interest rate shift, she claims. “The Fed Chairman had indicated that he could take his time raising rates. Now, this may quickly become a fact,” Sheth remarked. We anticipate that this will help the US and international equities markets experience an early Santa Claus surge.

As mutual funds continue to be net purchasers and are loaded with cash from regular investors via the SIP channel, the market surge might spread to India. International funds are also joining these institutions; even though December is typically a slow month for foreign fund managers, they have already invested over Rs 8,600 crore in equities this month.

The Sensex rebounded 403 points on Tuesday to reach 62,533 points and end a two-session losing streak. Infosys, TCS, and Reliance Industries led the rise. However, selling in companies like Tata Steel, Maruti, and HUL restrained the gains to some extent, according to BSE statistics. However, at least two of the top overseas brokerages are warning that the Santa Claus surge of the coming days might not carry over to the following year.

BofA Securities stated during the day that they anticipate a 5% rally in 2023 since the Indian market appears to be overvalued and there is a potential that Nifty businesses’ earnings might decline owing to reasons outside of India. It has set a December 2023 Nifty target of 19,500 points. Another well-known international trading firm, BNP Paribas, predicted that the Sensex will reach 66,000 points by December 2023, up 5.5% from Tuesday’s closing. In contrast to India, Korea, and Indonesia, the brokerage house is overweight in China, Hong Kong, and Thailand.

What exactly is a Santa Claus rally?

A ‘Santa Claus Rally’ refers to the phenomenon in which the stock market rises in value during the last week of December and the first two trading days of the New Year. The idea originated in the US markets. Although the causes for this bounce are arguable, it is frequently ascribed to increased purchasing activity by investors looking to take advantage of year-end tax benefits, given that the US operates on a calendar-year basis, as well as a general sense of optimism during the holiday season.

Positive gains on the stock market are common during the last five business days of December and the first two business days of January, although this is by no means guaranteed. Yale Hirsch first noticed it in the 1972 edition of The Stock Trader’s Almanac.

Between 1950 and 2019, the Santa Claus Rally happened 76% of the time. The market has grown an average of 1.3% every year throughout that period, according to the 2019 Stock Trader’s Almanac. Since 1993, Santa rallies have occurred around two-thirds of the time.

“Historically, the S& P 500 has finished positive 76% of the time in the previous 45 years, indicating that the rally is genuine. As a result, whether you believe in the Santa Claus rally or not, it’s difficult to dispute that it’s normally a strong period for the stock market “said Vaibhav Jain, WealthDesk’s Head of Wealth Management Partnerships and Sales. Some experts believe that a Santa Claus Rally predicts market performance for the entire subsequent year, yet there is no convincing proof that this occurs.

There is no obvious cause for the Santa Claus rally, although there are some probable explanations for stock market gains that week: Trading activity is often low since institutional investors take the week after Christmas off. Retail investors, who are more optimistic, have greater clout in the market. The January impact occurs when investors buy equities in anticipation of a January surge. At the end of December, investors may have already begun reinvesting tax loss harvesting funds. The week between Christmas and New Year’s is filled with hope and optimism for the future year.

“Trading volumes are projected to remain low in the final week of December owing to FIIs and foreign Fund Managers departing for the holidays, and a robust Christmas sales-filled Q3FY23 is considered as a favorable chance among domestic investors before Q3 results are released. So, we anticipate DIIs to make use of the opportunity and retail investors to look out for the expected year-end surge, “Anmol Das, Head of Research at Teji Mandi, a Motilal Oswal Financial Services subsidiary, agreed.

Santa Claus rally, Holiday-shortened week: What to know in the week ahead

“Due to FIIs and foreign fund managers leaving for holiday, trade volumes in the final week of December are anticipated to remain low. Domestic investors view the strong third quarter of FY23, which was loaded with holiday sales, as a favorable opportunity before the third quarter results are released. So, we anticipate that DIIs would take advantage of the opportunity and retail investors will keep an eye out for the likely year-end rise “the Motilal Oswal Financial Services subsidiary Teji Mandi’s Head of Research, Anmol Das, stated this phenomenon is not particularly visible in India, but during the past two years, Indian markets have also seen a slight rebound at the end of the year.

Stocks in industries including energy, finance, healthcare, infotech, electricity, and telecom are likely to be impacted at this time. Due to the market sentiments around these stocks over the holidays, there is a chance that stocks in the banking and finance sector, cement, FMCG, and technology would increase specifically for this season. “Investors may see an uptick in the price of equities in several industries during a Santa Claus rally, including technology, consumer goods, and healthcare.

Because investors are confident in the future and are prepared to take on more risk in quest of greater rewards, these sectors often do well. By carefully investigating firms in these industries and seeking stocks that are primed for development, retail investors may profit from this surge “said Mayank Mehraa, principal partner and small case manager at Craving Alpha.

“A solid Q3FY23 is in the cards,” said Anmol Das, Head of Research at Teji Mandi, a Motilal Oswal Financial Services subsidiary. “This quarter is predicted to be tremendously good for the retail consumption, FMCG, QSR, and Automobiles & OEMs, coupled with PSU Banks continuing their performance.”

Does the Santa Claus rally in the US imply one for India as well?

The Santa Claus rally is not specific to any one nation, and equities in India frequently see a similar impact. Even if the US market appears to be on the upswing, it is hard to dismiss the fact that the US is a market driver and that there has been a moderate to the strong link between daily returns in the US and Indian markets. Since every uptick or decline in the US market that occurs overnight will affect the Asian and other markets the following day, it is quite pertinent to India, according to Jain.

In the previous nine out of the last ten calendar years, the Indian Nifty Index has seen upward patterns in the last two weeks of the year. “In nine of the previous ten calendar years, according to history, the market generated gains in the last 15 days of the year. To put this surge into perspective, even the S&P 500 couldn’t pull it off in the previous ten years. As a result, a Santa Claus rally is also possible in India “Managing Partner of ASL Partners, Abhinay Sharma, remarked.What is a Santa Rally, and will we have one this year?

The Nifty50 generated a 2.2% gain in the final 15 trading days of 2020. In 2019, 0.5% in 2018, 1.9% in 2017, and 0.6% in 2016, the 50-pack index returned 1.7%. Sharma said that it fell 1.9% in 2011. Additionally, while overseas mutual funds are brimming with cash from ordinary investors, who continue to be net purchasers, the market surge might spread to India.

“The FIIs, who have been predominantly driving our markets, is on leave, although the excuse of year-end tax advantages does not apply here. As a result, the volumes are modest, with individual investors—who are often bullish and net buyers—making up the majority of participants. In the previous 20 years, the Nifty50 has risen in December 80% of the time historically, on average by 3.2%. It appears that the Santa Claus Rally also has relevance for India.

It is uncertain, though, if Indian markets would follow the lead of their international counterparts by year’s end as market participants become aware of the decoupling theory in action, added Jain. There is a chance of incoming flows given that certain motivated investors invest internationally, especially in emerging markets like India. As a result, their favorable attitudes may spread to domestic investors. Foreign investors often allocate more money to India’s banking, consumer discretionary, energy, and IT services sectors. Thus, they could experience the effects.

However, several domestic and international market variables interact to affect the net trade activity. For example, the January impact, when investors buy equities in the new year following year-end sell-offs for tax considerations, counters the Santa Claus surge, according to Prateek Pant, Chief Business Officer of Whiteoak Capital Asset Management Ltd.

Retail investors need to be aware that the Santa Claus rally is not a guarantee and that stock prices might still decline during this time. “Before investing, it is crucial for investors to thoroughly weigh the risks and potential returns. Investors should also be aware of the possible effects of occurrences like the continuing COVID-19 epidemic, which may influence stock prices and market circumstances “Mehraa stated.

Will investors be gifted a Santa rally?

“Indian individual investors should only think about investing from a long-term wealth development viewpoint and not get distracted by such short-term market fluctuations. Investment is a marathon, not a 100-meter dash. Pick the correct investments, practice patience, and invest regularly. Long-term market returns typically hover in the mid-teens, following India’s nominal GDP growth rate and long-term corporate profitability growth “said Prateek Pant, Whiteoak Capital Asset Management Ltd.’s chief business officer. Retail investors should use historical data to recognize patterns, and then diversify their bets on a portfolio of companies that represent the theme may be a successful trading method for retail investors.

edited and proofread by nikita sharma

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