UK investors hoping for a Santa Rally this year must factor in the added complication of the General Election on December 12 and the prospect of Britain leaving the European Union on January 31 next year.
The so-called Santa Rally is the phenomenon whereby global stock markets soar in December. Rather than being driven by investors' getting into the festive spirit, the trend is typically prompted by professional fund managers who have historically tended to reduce their cash holdings and pile in to the stock market to boost returns before reporting to clients in the New Year.
Jason Hollands, managing director at BestInvest, says many hedge funds also close their short positions (bets against stocks) over the festive period, often because there are fewer staff on hand to monitor market movements and this can have a positive effect on stocks.
December 2018 was not a particularly good example of the Santa Rally as global equities slumped amid heightened trade war fears – the US stock markets slid around 10% in the final month of 2018.
But research from BestInvest shows that the Santa Rally has held true in most of the last 50 years, with global equities rising 81% of the time in December. UK equities gained in 74% of Decembers of that period, while Japan – where the trend is least in evidence – still rose in 64% of the last 50 years.
Adrian Lowcock, head of personal investing at Willis Owen, says that traditionally the Santa Rally can be tracked from December 10, but this is complicated by an election two days later this year. He thinks a decisive election result could trigger a surge on the UK stock market.
Indeed, with the Conservative Party slated to win a majority in next week’s election – if the polls are to be trusted – the prospect of a “Boris Bounce” has become mixed up with the idea of a Santa Rally, the traditional year-end rise in stocks that has stood the test of time.
Relief Rally?
Hollands thinks there could also be a “sharp relief rally” if Labour’s Jeremy Corbyn is defeated at the polls. He explains: “If the risk of nationalisations clears and some form of orderly departure from the EU is in sight, sentiment should improve and we may see international investors start buying UK shares again.”
Interactive Investor’s head of equity strategy, Lee Wild, says that a Boris Johnson majority, coupled with the high spending plans laid out in the Conservative manifesto, could propel UK markets higher next year.
One of the biggest beneficiaries of any bout of festive cheer would likely be the FTSE 250. The mid-cap index, which is seen as a bellwether of the state of the UK economy, has surged 1,600 points since early October to break through 21,000 at the end of November - a 15-month high and within touching distance of its 2018 record highs. The FTSE 100, meanwhile, is around 300 points higher since October at 7,375, still a way off the record high above 7,800 points set in May 2018.
Alistair Mundy, head of value investing and manager of the Silver-Rated Investec UK Special Situations fund is focusing on UK domestic stocks such as Lloyds, which he thinks will benefit from a political resolution. He says there has been a “buyer’s strike” among UK investors but that sentiment could turn around quickly. Of the political impasse of recent years, he says that at this stage, “any Brexit will do”. Still his colleague Simon Brazier, manager of the Bronze-Rated Investec UK Alpha fund thinks UK stocks aren’t particularly cheap despite the uncertainty – and he’s reduced his portfolio exposure to UK revenues to 27%.
