Ride the ‘Santa Rally’ with two risky shortterm portfolios
The stock market normally does well in winter and the recent sell-off makes now a promising time to buy, says Harry Brennan
British shares suffered their worst month for three years in October as stock markets around the world tumbled. British and European markets fell by 5.4pc and 5.6pc respectively, while in America stocks fell by 6.9pc. Giant tech companies took huge hits: Google’s shares lost 10pc, while Amazon and Netflix fell by about 20pc.
Investors’ mood is low. Net sales of funds have declined by around 90pc compared with the same time last year, according to the Investment Association, the fund managers’ trade body.
However, a statistical trend backed by decades of data promises to dissipate this doom and gloom and suggests that stocks will recover over the winter with renewed vigour.
Historically, the winter months from November to April tend to be better for investors than any other part of the year. This phenomenon is often referred to as the “Santa Rally”, where stock markets post positive returns in the run-up to Christmas and the new year.
British investors, for example, have come to expect FTSE 100 shares to outperform over the festive period. From 1985 to 2015 the index of the country’s 100 largest quoted companies has made an average gain of 2.3pc in the last month of the year and risen in value 83pc of the time, according to IG, an investment shop.
There is no single reason for the seasonal outperformance, but suggestions include increased consumer activity around Christmas, fund managers rebalancing their portfolios and people investing endof-year bonuses.
Experts have said they expect stock markets to recover over the next six months and that the best time to buy shares is after they have fallen.
How can private investors make the most of the stock market’s wintertime trend? For the more adventurous, Interactive Investor, a fund shop, has put together two concentrated portfolios of stocks it believes will perform better than the rest of the market and return a sizeable profit in six months.
The strategy is high risk but simple: pick one of the two portfolios, or both, buy your stocks at the beginning of November and sell them at the end of April.
The first or “Consistent” portfolio includes five stocks that have gained in value each year for the past decade. Owning them over the past 10 years would have given you an annual return of 19pc, dwarfing the FTSE 350 index’s 4.5pc growth over the same period. The stocks are: InterContinental Hotels; Howdens Joinery, the kitchen supplier; Hill & Smith, the industrial group; Greene King, the pub chain; and Croda International, the chemicals company.
The second or “Aggressive” portfolio requires investors to take even more risk. The five companies that make up the portfolio have had positive returns over nine of the past 10 years, with an overall average annual return of 28.2pc.
The selections are Ashtead, the rental company; JD Sports, the retailer; IWG, the workspace provider; Bodycote, the engineering firm; and Rightmove, the property website.
Interactive Investor’s Lee Wild stressed that this strategy was not for the faint-hearted, but should be seen as a way to turbocharge any spare investable cash you may have towards the end of the year. “This seasonal strategy assumes that we’re now entering the strongest six months of the year, so the sell-off makes these stocks even more attractive,” he said.
Mr Wild admitted that Brexit, rising interest rates and trade tensions between China and America could prove to be barriers to success. However, many professional investors have a positive outlook for the short term.
Steve Adams of Kames Capital, the asset manager, said the economic outlook was good, a recession was unlikely and stock markets would benefit from companies increasingly buying back their own shares. He added that Western markets had historically performed well after midterm elections in America and there was potential for improved relations between America and China.
Peter Sleep of 7IM, another asset manager, said the recent market tumble should not put investors off. “The stock market volatility we saw in October is not unusual,” he said. “Historically it has been a volatile month; the 1987 crash was in October, for example. We took the recent fall in American stocks as an opportunity to trade and last week increased our exposure.
“The fundamentals for the US are sound – we see no immediate signs of recession, corporate confidence is at a 40-year high, the labour market is at a multi-year high, inflation is under control and the earnings season looks likely to be strong.”
William Hobbs of Barclays Smart Investor, a fund shop, said the outlook for British shares was also decent. He said now, before stock prices recover from their recent dip, was the time to buy.
“Sentiment is depressed, but historically when you buy at low points and when investor sentiment is low, the returns available are increased – you tend to get a rally after a fall,” he added.
Britons’ addiction to cash has cost them £127bn over the past two decades, according to research that also suggests savers have not learnt their lesson.
People who shunned stocks and shares in favour of “safe” cash accounts earned £75bn in interest, compared with the £202bn returned to stock market investors over the same period.
The analysis, by the Centre for Economics and Business Research and Scottish Friendly and shared exclusively with Telegraph Money, compared cash Isas with stocks and shares Isas since the tax-free accounts were launched in 1999.
It found a saver who used their full cash Isa allowance each year from April 1 1999 to October 2018 would have accrued £20,628 in interest, based on average rates. Those who invested their money instead would have enjoyed returns of £70,987, based on total returns from the FTSE All-Share Index after fees.
Dire interest rates in the wake of the financial crisis drove down cash savers’ returns, while investors’ success has come despite the 2001 and 2008 stock market crashes and more recent wobbles.
Successive governments have raised the amounts you can shelter in Isas free of tax, from £7,000 a year in 1999, to £20,000 since 2017-18.
Yet cash Isas remain twice as popular as stocks and shares accounts. Research from Scottish Friendly, a mutual investment company, suggests 40pc of people save into a cash Isa, while only one in 10 (11pc) invest regularly.
And the plight of those who shy away from investing is getting worse.
Since 2008 the average cash Isa interest rate has almost always been lower than inflation. In the past two years, savers have suffered negative annual real returns.
Scottish Friendly’s Calum Bennie said: “Thousands of people across the country are probably thinking they are doing the sensible thing by putting money aside for their future in a cash savings account. But many will not know that the real value of their cash is being eroded due to the toxic combination of pitiful savings rates and rising inflation.”
‘This strategy assumes that we are now entering the strongest six months of the year’
Stock markets tend to post positive returns in the months leading up to Christmas, a phenomenon known as the ‘Santa Rally’