Investors pinning their hopes on the Santa Rally may be feeling somewhat short-changed after the U.K.’s leading blue chip index plunged to a three-year low on Monday.
The FTSE 100 closed 1.3% in the red at 5874.06 as the commodity price rout and jitters over a Fed rate rise combined to create a toxic investment cocktail which left investors with a bitter – rather than festive – taste in their mouths.
It seems the Santa Rally, thus far, has been replaced by the Santa Rout and it feels an age away since the FTSE 100 stormed to an all time year high of 7,104 in April. Since then, concerns around a slowdown in emerging markets, and particularly China, have seen the index tumble.
The FTSE’s fall below the psychologically important 6,000 mark is that much more dramatic when viewed against the bullish outlook at the start of the year, when some experts predicted the index would rise to 7,700 and beyond in 2015.
While events since April have demonstrated that such predictions were wide of the mark, downtrodden investors have nevertheless been hoping for some Christmas cheer in the form of the Santa Rally – the term coined in reference to the FTSE’s historical ability to deliver positive returns in December. Indeed, history shows this golden month for investors has achieved positive returns in 26 of the past 31 years.
While a Santa Rally could still be on the cards were the FTSE to stage a strong recovery, investors thus far will be left bemoaning the fact that Santa’s sack seems half empty.
To make things worse for equity investors, those looking to equities as a source of income – either through individual stocks or via equity income funds – might be in for more bad news. Although 2015 is set to be another record year for U.K. dividends, it may also represent something of a high-water mark.
Major income payers have recently decided to stop or suspend payments, with emerging markets-focused Standard Chartered announcing in November it will scrap its dividend, and mining giant Anglo American announcing earlier this month it too will suspend its dividend as part of a radical restructure.
With commodity prices in freefall, investors should not be surprised if other major mining firms follow in the footsteps of Anglo American.
Meanwhile pension funds heavily-reliant upon dividend income for investment returns will see any erosion in dividend levels triggering negative ramifications for cash flow and potentially performance if it means funds have to cannibalise capital to meet short-term obligations.
Another kick in the teeth for U.K. investors relying on dividend income manifests in the form of changes to the dividend tax announced in the Summer Budget, which will considerably increase the rate for some investors when it’s implemented in April 2016.
All of which pulls into even sharper focus (for already nervy investors) this Wednesday’s eagerly-anticipated meeting of the US Federal Reserve.
It now seems with near certainty that Fed chair Janet Yellen and other members of the FOMC will bring to an end months of ‘will-they, won’t they’ speculation by announcing the first increase in interest rates since the depths of the financial crisis.
Positive U.S. employment figures and indications that the U.S. economy is now on a better footing strongly support such a move, which analysts are touting as a seminal moment.
With interest rate hikes historically having a negative impact on stock prices, at least in the short-term, U.K. investors will no doubt have their eyes firmly peeled on the markets should the Fed lift rates.
However, any rate increase on Wednesday will not follow historical norms.
First and foremost, there will be minimal shock value because a rate rise would, in the words of New York Fed head William Dudley, probably be “the most well-advertised, discussed, thought-about, mused-over prospect of beginning a normalisation of monetary policy in history.” So markets have factored it in.
Secondly, consequent rate rises in 2016 will likely be very gradual in order to calm markets.
But if a rate rise across the pond does usher in a wave of volatility then this is no bad thing for those invested in active funds. Volatility allows active managers to really prove their worth by outperforming and beating their benchmarks.
So although the hoped-for Santa Rally has yet to materialize, there could still be some festive cheer by year end and into 2016 for those invested in actively run mutual funds.