Mail Online

Ho-ho-ho, time for a Santa rally

by Hamish McRae

SANTA CLAUS is back in town. No, not a rerelease of Elvis Presley’s 1957 rock ’n’ roll Christmas celebration, but rather an early version of a classic ‘Santa rally’ for asset prices.

Now it’s true we haven’t seen much seasonal cheer on the London Stock Exchange. But many British investors’ portfolios will have been rescued by their US holdings, particularly of big-tech companies, with Apple now back above $3trillion (£2.4trillion) in market capitalisation and Microsoft not far behind.

Homeowners here will also have noticed property prices nudging up again, a far cry from the prediction of the Office for Budget Responsibility in March that they would fall by 10 per cent.

There is even a bit of cheer on the gilt market, with the ten-year yield dipping below 4 per cent on Thursday. So what’s happening?

There are several explanations for a rally towards the end of the year, though normally the markets move forwards from mid-December on, rather than starting in November. One relates to Christmas festivities, a time when we splash out, so retail investors buy shares as well as presents. Another is that institutional investors don’t want to carry too much uninvested cash into the New Year.

But this year I think the main change is markets have sniffed a turning point both in inflation and interest rates. This is global. Most of the economic and financial news has been better than expected: inflation has been falling faster, growth higher, company results more positive, and so on.

As a result there is the prospect that the central banks will cut rates more swiftly than expected a few weeks ago. There won’t be any move this week, with the Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank all meeting. But do expect them to make more dovish statements about the year ahead. In any case, the markets are already cutting longer-term rates, hence the fall in gilt yields. The investment community is increasingly convinced that there won’t be a US recession, that judgment reinforced on Friday with strong job numbers.

Of course the global geopolitical outlook remains dark. But there is a stark contrast between politics and economics, and the markets care more about the latter.

Remember how a year ago many professional investors predicted that this year would see falling share prices? They have been very wrong, certainly as far as most markets are concerned, including the US which accounts for more than half of all global value.

Thus the S&P 500 index is up 20 per cent; the main German DAX index, up 19 per cent; the Nikkei 225 in Japan up 24 per cent; and the French CAC up 14 per cent.

Indeed the UK is a rare exception, with the FTSE 100 almost exactly where it was on January 3, the first day of trading this year. But then, for reasons we know, the UK is still an unfashionable place for investors, I think absurdly so. The recent uprating of its growth and revisions suggesting unemployment is 3.5 per cent, its lowest since 1969, have failed to shift that negative perception.

The change of mood will come, but it is impossible to predict when. Meanwhile the companies on the Footsie offer great value and a solid dividend yield of about 3.9 per cent.

The predictions for the markets next year from global asset managers are starting to come in and when we have a few more of them I will try to identify some common themes. Meanwhile a cautionary note and a more positive one.

The first comes from research done by the economist Joel Waldfogel back in 1993, called The Deadweight Loss Of Christmas. In it he showed how people who received gifts valued them at less than the price paid for them. They appreciated the thought behind the present and the generosity of the giver, but would not have spent the money that way themselves.

So just as we overpay for gifts, I wonder whether we collectively overpay for financial assets at this time of year. The best example I can think of was the peak of the dot-com boom at the end of 1999.

The other? There is no Santa Claus. I remember, aged five, that my parents reckoned I was old enough to know the truth and be told that it was they, and not Santa, who filled my sock on Christmas Eve when I was asleep.

My reply was: ‘Oh, you will keep doing it, won’t you?’

It is not Santa who fills our investment socks. It is the world economy, and as long as it keeps growing, it will continue to do so.

Markets have sniffed a turning point in inflation

Financial Mail On Sunday




dmg media (UK)