The lead up to Christmas is usually accompanied by the obligatory build up in excitement. It's not quite law (yet) but it is often enforced with fervour throughout offices the length of the country.
No-one is safe from the infectious merriment, not even, it seems, the FTSE 100.
December's 'Santa Rally' - not to be confused with the yuletide-themed, high-speed car race to the North Pole - is almost upon us, so don't be surprised if asset allocators start turning their attentions on UK Blue Chips.
OCM Wealth Management’s CEO, Jason Stather Lodge, is one such asset allocator and explains why they’re going overweight in the FTSE 100.
A recent Bank of America study showed that investors have increased their equity allocation to a six month high in recent days, prompting many to assume that equities will have a good end of term as we head into the New Year. If we look at the statistical significance of the market saying of “Sell in May and don’t come back until St Ledgers’ Day”, then 2015 saw a move of 13.5% for the FTSE100.
The much fabled “Santa Rally” statistically also holds some significance: equities have wrapped up the year with gains on all but five occasions since 1988, with December posting the biggest and most frequent increases of any month, according to Bloomberg.
The expected policy meetings from the ECB (Thursday 3rd December) and the Federal Reserve (16/17th December) should mean that markets remain robust into the Christmas period. The same paper from Bloomberg not only showed fund managers adding to their equity positions, but also reducing cash to a 10 month low. With central banks across the globe reaching for further stimulus and the economic data either stabilising or improving, then there seems optimism for the coming weeks. This is before we see earnings season, reporting, amongst other things, seasonal retail sales, which should confirm the longer term outlook for equities.
The latest member of the Bank of England’s (BoE) Monetary Policy Committee (MPC), Jan Vlieghe has suggested that they want a clearer direction of economic travel and growth to stabilise, even pick up a bit, before looking to move interest rates upwards. He added that he was relaxed about delaying the first interest rate rise, and expected rates to remain lower in the long term on the back of high levels of household debt and an ageing population. As a result, Monday saw an immediate reaction to the Sterling/US Dollar FX rate as Sterling traded down to below 1.50, which was the lowest level since April. This pushed the 15Y Gilt yield back towards 2% once more, which has a very significant effect on the value of certain pension schemes.
Further evidence of dampening prospects for the first rate increase emerged on Tuesday morning, as manufacturing growth data slowed slightly. This is no great surprise given it was running at a 16 month high. This tallies with our “Goldilocks” thinking of not too hot and not too cold, that things look positive if not record breaking, all of which are good for the long term prospects.
So as we enter December we have decided to echo our thoughts on the above expected rally into the New Year, by going overweight the UK and specifically the FTSE 100 to take advantage of what we see are significant tail winds for the coming weeks. Likewise, given the contribution we had received from our Japanese exposure which had benefited from the strong currency and domestic stock market, we have decided to take profits. Additionally we have marginally shaved back our Emerging Market exposure, using the proceeds to be overweight to the UK. As it stands, if we see a strong rally towards year end we will start to unwind some of the more tactical positions and lock in profits again. As long as the global economy continues to chug along then there is nowhere else to go in order to find strong returns.
missing the last month of the year would have cost someone who had invested £10,000 thirty years ago, almost £80,000 today