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Will this year bring a ‘Santa rally’ for stock markets?

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It wouldn’t be Christmas without a discussion of whether the ‘Santa Rally’ truly exists. Like ‘sell in May and go away’, the potential for a market rally in the run up to Christmas is an annual source of debate.

There is little doubt that it has been a phenomenon in the past, attributed to everything from ‘seasonal cheerfulness’, to lower trading volumes, to fund managers trying to make their numbers ahead of bonus season.

But it does unquestionably happen, to the point where it may now be self-perpetuating. Richard J Hunter

head of markets at Interactive Investor looked back over 20 years to provide a test: “Simply taking the December low of the FTSE 100 in the years back to 1998, and then comparing them to the high over the remainder of the month (as opposed to looking at the calendar month between the 1st and the 31st), the “Santa Rally” happened every year – without exception.

The group’s research also found that the market likes to finish the year on a very positive note, with the highest point of the rally falling in the trading days between Christmas and the New Year in 19 out of 20 years. That means, in theory at least, investors still have time to top up their investments and benefit.

However, investors are unlikely to make millions. The average gain is 5.8% – adding £58 to a £1000 portfolio.

Online investment group BestInvest found that some markets tend to do better than others, as shown in the table below. Its research showed the Santa Rally was most pronounced across the emerging markets, which cover countries such as China, Brazil, South Korea, Russia and South Africa. These markets have had a particularly gruelling 2018 so far, but the longer term trend may be in their favour.

Index % of times Markets rose in December Median Return in month of December
FTSE 100 (Largest UK shares) 79% 2.4%
MSCI World (Largest global companies) 77% 1.3%
FTSE All Share (Overall UK market) 75% 1.7%
MSCI Europe ex UK (European companies) 74% 1.7%
S&P 500 (Largest US shares) 73% 1.3%
Topix (Japanese shares) 68% 2.5%
MSCI Emerging Markets 65% 3.3%

Source: Bestinvest / Lipper. Data represents capital return only and excludes the impact of dividends. 

However, there are flaws in trying to time the market in this way. Laith Khalaf, senior analyst at Hargreaves Lansdown points out that while only investing in December for the last 32 years would have netted a return of 128% – meaning £10,000 would have grown to £22,762 – if investors had held all year round, they’d be sitting on £191,195. Admittedly, skipping December completely would have cost £107,197, but it does illustrate the dangers of market timing. Khalaf adds: “It’s still better to be invested for the long term rather than doing a festive hokey-cokey with your money.”

And the future?

Jason Hollands, managing director of Bestinvest, “Of course there is no inevitably that markets will rise this December just because they often have in the past. We would strongly caution against investing with a one month view and instead encourage people to focus on the long-term.

“But with shares having sold off since October, valuations have certainly come down to much more reasonable levels. It will be interesting to see whether markets will now bounce back with a Santa Rally buoyed by bargain hunters, or whether December 2018 will buck the longer-term trend.”

Hunter agrees there is no guarantee of a repeat in 2018, particularly given the current concerns which have added to volatility and made sentiment fragile: “Any slowdown in the burgeoning US economy will be pounced upon, while the Federal Reserve’s tightening policy (likely to be proven further by another interest rate hike in December) and the escalating trade spat with China could both have detrimental effects.”

Nevertheless, for anyone wanting to give it a try, Adrian Lowcock, head of personal investing, Willis Owen, suggests the following funds:

Man GLG Undervalued Assets – “Henry Dixon and co-manager Jack Barrat believe they can add value through thorough analysis of company balance sheets to understand a business’s true real-world assets and liabilities. They seek to identify two types of stock: those trading below their view of the company’s value and those where the company’s profit stream is being undervalued relative to the cost of capital.”

Investec UK Alpha – “Simon Brazier blends fundamental company research with economic analysis and believes that a clear understanding of the economic and thematic background is important. He then meets company management and sees this as key to his approach. His assessment of a company management’s track record, strategy, and allocation of free cash flow are vital parts of the research framework, alongside a thorough valuation analysis considering both the upside potential and downside risk of any investment.”



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