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Is a Santa rally coming to town?

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December is typically one of the best months of the year for stock market returns. Will this year be any different?

While stock markets may seemingly be on hold as they wait to hear on the US Federal Reserve’s decision on whether or not to raise interest rate, investors may be hoping for last minute gift of returns from the big man in a red suit.

Axa Wealth’s head of investing Adrain Lowcock notes that statistically the UK stock market tends to rise gently in the the first couple of weeks in December, before a trend known as the “Santa rally” takes hold. The result is that the last two weeks of a calendar year are typically the strongest two week period of the entire calendar year.

The strongest Santa rally took place in 1987 when the FTSE rose 8.4% and since 1984 the index has risen by an average of 2.4% during December. So could Santa be heading into town this year?

“A decision either way from the Fed could be the trigger for the rally,” Lowcock says. “This year we have seen a repeat of 2014 with oil and mining stocks suffering the most from lower commodity prices as concerns over a slowdown in China hit the sector. However for any meaningful rally in these sectors we would need things to stabilise first.”

So what could cause this so-called Santa rally? Lowcock argues it is probably down to a mixture of factors, including fund managers repositioning their portfolios ahead of the year end, or it could be down to the good will associated with the festive season putting professional investors “in a positive mood”.

However Lowcock cautions investors to look beyond a Santa rally as he says stock markets can deliver better returns the longer you are invested.

He explains: “If you only invested each December since 1984 your investment would have grown 72%, while if you had stayed invested all the time you would have seen a 436% return, excluding dividends and before costs.”

So what funds could take advantage of such a rally? Lowcock picks out Neil Woodford’s UK Equity Income fund and Richard Buxton’s Old Mutual UK Alpha fund.

“Woodford seeks to add value by investing in out-of-favour companies for the long-term,” he says. “The manager takes into account both the wider economic and corporate environments, which he believes are constantly evolving.

“Buxton is a traditional contrarian investor buying unloved stocks and waiting for the market to change its view. He builds a concentrated portfolio and takes high conviction positions in sectors which are undergoing structural change.”