After a difficult couple of months for markets, some investors may be looking forward to a seasonal bump as Christmas approaches. But where is the best place to look?
The FTSE All Share index has lost 6.4 per cent – as the below chart shows – during the first two months of the fourth quarter, buffeted by the ongoing concerns over the Brexit process as well as a broader sell-off fuelled by hawkish comments from the Federal Reserve.
Performance of index in Q4 2018
Source: FE Analytics
However, for more opportunistic investors the drop-off in markets could provide an attractive buying opportunity, particularly if markets see a seasonal ‘Santa rally’ this year.
A so-called ‘Santa rally’ is commonly described when markets rise during the month of December.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the FTSE All Share has delivered a positive total return in 27 of the 32 Decembers since its launch in 1986, more than any other month.
The analyst noted that the index – which captures 98-99 per cent of the UK stock market capitalisation – had also delivered the highest average return of any month in December, at 2.6 per cent.
“The Santa rally is one stock market superstition which does have a fair amount of statistical backing, even though there’s little rational explanation for its occurrence,” he said.
However, the analyst warned against performing a “festive hokey-cokey” and advocated that investors remain invested for the longer term.
“The year so far has seen a return to more turbulent markets, though in fact this is more normal behaviour than the eerie calm of 2017,” he said.
“The unfolding Brexit drama will undoubtedly play a part in how the stock market performs this Christmas, and this could push stock prices in either direction.”
The phenomenon isn’t just restricted to the UK, according to Bestinvest.
In its analysis of data from the past 40 years, the firm found that there was strong evidence to suggest that other markets typically deliver positive returns in the month of December.
“What is less clear is why markets have a tendency to rise during the final month of the year,” said Bestinvest managing director Jason Hollands. “This is, after all, typically a quiet time for companies reporting their results.
“One theory is that year-end positive momentum in the markets may be down to fund managers reducing their cash weightings and ‘window dressing’ their portfolios with stocks that have performed well ahead of reporting periods to clients in the New Year.
“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.”
Hollands added: “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.”
As a point of interest, FE Trustnet decided to look at which funds and sectors have had greater success in delivering positive performance during previous Decembers, although it should be noted that past performance is not a guide to future returns.
Performance of indices in December over 10yrs
Source: FE Analytics
Investors may be interested to learn that the IA Japanese Smaller Companies sector is the only peer group – beyond money market strategies – that has delivered a positive return in each of the past 10 Decembers stretching back to 2008.
Two funds from the tiny sector have a track record of delivering positive returns in each of the past 10 Decembers: Baillie Gifford Japanese Smaller Companies and Janus Henderson Horizon Japanese Smaller Companies.
The £822.2m four FE Crown-rated Baillie Gifford Japanese Smaller Companies fund is now managed by Praveen Kumar, who joined the fund since 2015, but it was previously been overseen by Japanese equities veteran Sarah Whitley before she retired earlier this year. Over a decade of Decembers it has generated an average return of 2.4 per cent.
The £312.6m Janus Henderson Horizon Japanese Smaller Companies fund is also four FE Crown-rated and has been overseen by FE Alpha Manager Yun Young Lee since 2005. Its average return is 3.8 per cent.
There have also been some consistently good performances in December over 10 years from some other well-known funds.
The £2bn AXA Framlington UK Select Opportunities fund – overseen by outgoing manager Nigel Thomas – is one such example from the IA UK All Companies sector, with an average return in December of 2.3 per cent.
Another well-known fund with a strong track record in December is the £1.7bn Jupiter Merlin Balanced Portfolio, managed by the firm’s multi-asset team and made up of John Chatfeild-Roberts, Algy Smith-Maxwell, Amanda Sillars and David Lewis. It has an average return of 1.3 per cent.
While just one sector has delivered positive returns in each December over 10 years, over five years quite a few other sectors have managed the feat.
Performance of sectors in December over 5yrs
Source: FE Analytics
Interestingly, the IA Japanese Smaller Companies sector is joined by other small-cap focused sectors: the IA European Smaller Companies and IA UK Smaller Companies sectors.
Another top performer during the past five Decembers is the IA North America, although sectors home to alternative strategies such as IA UK Direct Property and IA Targeted Absolute Return have also achieved positive returns at the end of each year.