9th December 2013
Edmund Shing considers ways to benefit from the festive statistical effect known as the Santa rally
Some of you may well have already heard of seasonal effects in the stock markets such as the Halloween effect – that the strongest performance of stocks tends to occur between the beginning of November and the end of April each year. This also gives rise to the well-worn stock market adage: “Sell in May and go away.”
Well, we can be even more specific than that! The best stock market performance of the year, as judged by discrete four-week periods, tends to occur statistically over the last two weeks of December and the first two weeks of the New Year – the so-called “Santa Claus rally”.
UK Stocks Do Well Over December-January
Looking over the period 1996-2013, we can see from the first chart above that the 4-week period starting in December (week 49) and stretching into the following January have typically been the strongest of any 4-week period during the UK stock market year, with the FTSE-100 gaining on average as much as 2.5% in 4 weeks taking in the Christmas/New year festive period.
However, note in the second chart above that the 4-week performance is even stronger for UK small-caps, with an average gain of as much as 4% from mid-December (week 51) to mid-January.
Emerging Markets: Another way to benefit from Santa’s largesse
In addition to small-cap stocks, another way to benefit from the Santa Claus rally is to invest in emerging market stocks: the chart below of the average 4-week price performance by week for the MSCI Emerging Markets index shows that again, holding emerging markets stocks from the second week in December (week 50) for 4 weeks typically delivers the best performance of any 4-week period during the year.
Santa also likes Emerging Markets
Source: FTSE, Bloomberg, Author’s calculations. Period taken: 1999-2013
Here you have two choices: you can either just buy an ETF or fund that invests in this overall MSCI Emerging Markets index, or you can look at which emerging markets in particular are currently moving higher. Over November and the month to date, the best emerging stock markets have been:
China, India, and Israel
(although strictly speaking, Israel is not an emerging market any more, now being classified instead with developed markets)
Ways to play this statistical effect
There are several ETFs and investment trusts that we can use to potentially benefit from this anticipated Santa Claus rally:
UK Small-Caps: You could go either for the iShares MSCI UK Small-Cap ETF (CUKS), or one of a number of UK Small-Cap investment trusts such as the Schroder Mid & Small Cap Fund (SCP), the Standard Life Smaller Companies Trust (SLS) or the Henderson Smaller Companies investment trust (HSL);
Emerging Markets: there are the London-quoted iShares MSCI Emerging Markets UCITS ETF (SEMA) or the SPDR MSCI EM Asia UCITS ETF (EMAS), if you prefer to invest just in Asia;
Single country ETFs/investment trusts: Focusing on the best performers of the moment, iShares offer a China Large-Cap UCITS ETF (FXC), or if you prefer to invest in Indian stocks, then there is the JPMorgan Indian investment trust (JII), which currently sits at a 14% discount to its underlying net asset value, according to the Association of Investment Companies’ statistics website.
Note however that in this article I am merely commenting here on the statistical effect that is the Santa Claus rally. You may wish to add into this investment mix your own macro fundamental analysis in determining which investment you prefer to hold over the festive period.