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LGT Vestra US

CIO Question Time – Santa Rallies and the Bank of Japan - Dec 2016

Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP

Does a “Santa Rally” really exist?

At this time of year a positive market move is often referred to as a “Santa Rally” – why is this? There is a feeling that markets rally as people square positions for year end in relatively thin markets. If the market is up on the year, investment managers do not want to be seen as underweight and adjust their portfolios accordingly. This window dressing may contribute to a positive market. Another reason could be due to the dearth of results where bad news may not get the attention that it would usually, if the party season was not in full swing. Or, perhaps it could even be that goodwill to all men gives a more positive atmosphere that rubs off on stocks...

At a young age, we all want to believe in Father Christmas. Similarly, it is easy to get carried away with the Christmas spirit and believe in a “Santa Rally”, but does it really exist?

Looking back at the FTSE 100 Index over the last 20 years, 85% of past Decembers have shown a positive return, whereas on average only 55% of months have shown positive returns. Meaning that, whilst past performance is not an indication of future performance, we can continue to believe in Santa as long as we have been good children all year!

Are there any significant points we should take from this week’s Bank of Japan’s Monetary Policy Statement?

At this week’s Monetary Policy Meeting, the Bank of Japan kept monetary policy on hold and turned more optimistic for economic growth next year. Japan has been struggling with a weak economy for many years and consequently, has moved interest rates negative in an attempt to boost growth. There has been an effort to weaken the currency to push exports up and increase inflation. This year, up until the US election, the yen had actually strengthened relative to the US dollar meaning that this part of the policy was not working and the Nikkei equity index had fallen by approximately 10%. Following the US election, the equity and currency market move has reversed. To put this in context, the Nikkei is up 13% since the election in local currency terms but only 1% in dollar terms whereas the S&P 500 US equity index is up 6% in the same time period. Japan’sThe Central Bank Governor, Haruhiko Kuroda, observed that the currency move was due to a stronger dollar rather than a weak yen.

The positive revision in economic outlook is unsurprising given the shift in the currency and potentially stronger growth in the US off the back of Trump’s spending plans. However, this is more due to action on the other side of the Pacific rather than actions taken by the Bank of Japan and there remain uncertainties about what Trump will actually do. We have been waiting many years for a Japanese recovery, but the aging population and high level of government debt may yet weigh on the economy for some years to come.

 

Merry Christmas and a Happy New Year to all our readers.

 

 

 

 

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