Ride the ‘Santa Rally’ with two risky short­term port­fo­lios

The Daily Telegraph - Your Money - - MONEY - Sam Brod­beck

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’

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