Is December's Winning Streak Over by Lee Wild
December is traditionally one of the most lucrative for investors, but this year it has been one of the most volatile. Plunging oil prices, the Russian economic crisis, political concerns in Greece and any number of long-term issues bubbling away on the sidelines have caused wild swings in share prices. However, with attention now firmly on the Turkey and Christmas pudding, the FTSE 100 does not look in such bad shape.
At the beginning of the month, the blue chip index stood at 6,728. But between the 8th and 16th it plunged by almost 9%, ending up at 6,156. Now, the leading index is at 6,616, down 1.6% for the month. If there's no further improvement, 2014 will be the first negative return for December since 2002.
But it's still too soon to write this off as a losing month. In the 30 years since the FTSE 100 was created, the index has only fallen four times in the final month of the year, and generated an average return of 2.5%. In fact, the final fortnight of the year has been the strongest two-week period of the entire year and includes the three strongest days of the year - the week beginning 14 December is the strongest week and, according to the UK Stock Market Almanac, 27 Dec is the strongest market day.
Whatever the outcome, there are reasons to believe next year will be positive for shares.
Here's why the analysts at Barclays think investors should stick with equities in 2015.
1) Equity positioning is now neutral after being extended at the start of the selloff
Our composite beta measure had reached post-crisis peaks in late November, which raised the risk of a selloff. Fund managers were positioned for a year-end rally despite continued redemptions. Heightened risks from Russia and Greece, as well as worries going into the FOMC meeting, led managers to cut exposure to neutral.
2) $105 billion of pent-up cash is still in money markets due to the volatility in Q4
Since market volatility began to increase in September, money market inflows have surged.
With last week's $24 billion inflow to money markets, we estimate that there is $105 billion in excess cash that should eventually go into bonds and equities in the weeks and months ahead. The build-up in cash this year has exceeded the build-ups of the prior two years by a sizeable margin. While higher cash balances are likely prudent in an environment of rising Fed rates and heightened macro risks, the latest inflows to money markets look excessive in our view.
When growth disappointed and yields fell in 2014, that cash in money markets seemingly went into bonds. In 2015 we believe the pent-up cash in large part will go back into equities, as bond yields have fallen dramatically in 2014 and the Fed is set to hike in mid-2015.
3) There is a sizeable $85 billion-plus fund flow underweight in equities relative to bonds
The "great reallocation" of bonds to equities in 2013 gave way to "balance" in 2014 with roughly equal bond and equity inflows up until October. A surge in bond inflows and equity outflows has left an implied $85 billion fund flow underweight in equities (based on 2014's balanced flows). However, equity inflows averaged $25b per month from January 2013 to June 2014. Assuming equity flows "catch up" to the trend level, there is a $155 billion implied end-investor underweight in equity funds. The speed of equity inflows matters for markets, as we saw in January 2013 when a surge in equity inflows and covering of underweight positions led to a 5% rally to start the year.
4) Lower pension equity allocations than Q4 2013 mean limited rebalance overhang
Going into this year, the S&P 500 was up 30% in 2013 and bonds were down 2%, with equities up 10% in Q4 13. The commensurate need to get equity allocations down from peak levels led to sizeable rebalance selling to start 2014. Bonds have outperformed global equities in 2014 and Q4 (underperformed the S&P 500), so the relative asset allocation backdrop is much different to start 2015. We believe that rebalance selling will be very limited to start 2015, just as inflows are likely to pick up.
5) The November payrolls report points to a sizeable pick up in aggregate earnings, which could also lead to higher than normal fund flows to start 2015
The November payroll report showed that employment, hours and wages all picked up. The combination of the three moving up in synch led to a 12% annualised rise in aggregate earnings in November, the biggest increase since 2006. While payroll data are volatile from month to month, the rise in income should lead to a rise in savings; and a portion of that savings goes into asset markets. So the recent pickup in earnings ahead of a seasonally strong fund flow period points to the potential for even stronger inflows to start 2015.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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