The Santa Rally of 2019- Will it happen or will it not?

Just like the mythical Santa Claus of Christmas who brings in gifts for all who have been good and well-behaved during the year, the Santa rally more often than not brings windfall gains for investors on the London Stock Exchange. In the last twenty-five years out of its pervious thirty years history, the market has given decent positive returns. The rally, which is more prominent on the FTSE 100 and the FTSE 250, coincides with the enhanced spending by consumers during the Christmas season and a jubilant mood among the British consumers.

The last year of 2018 was, however, an aberration when the British economy was marred by the unprecedented dark overcast of Brexit, which has kept all of British consumers and business owners on their edge. This year however the situation is very different. The dark clouds of Brexit have now subsided to a large extent as there is now greater clarity about the modalities around which the deal for the planned withdrawal will be woven around. The trade war situation between China and the United States of America is showing signs of subsiding and the general economic outlook in Europe is also showing signs of stability. There are however three main factors that will have a telling impact on the manner and extent of the Santa rally this year, should it so happen.

The 12 December 2019 general elections in United Kingdom – The General elections that are going to take place in United Kingdom in December will be the most prominent factor that will have an impact on this year’s Santa rally. Prime minister Boris Johnson’s poll plank, that he would go in for Brexit by October 2019 either with or without a deal fell flat on his face forcing him to call for fresh elections. He is now armed with a draft Brexit deal which is being described as having the best prospect of being adopted by the British Parliament. The election in December 2019, however, is going to be a referendum on the Draft deal of sorts, and on the future of Prime minister Johnson. The markets as well as the British common citizens who have seen a long period of turmoil have been fed up living in uncertainty and would prefer clarity and certainty above all. Should the prime minister and his party win a clear majority, the draft Brexit bill will go though, providing relief to the British businesses and also to common citizens. In fact, since after the October 2019 deadline was extended to January 2020 and General elections were called on 12 December 2019 to decide the future of the Prime Minister’s Draft Brexit deal, the markets as well as several economic indicators have started to look up.

The actual Brexit event happening with the deal - It still remains to be seen however what the actual structure of the bill is that will likely be passed by the British Parliament. As per several surveys and opinion polls conducted in the United Kingdom, it is not going to be an easy ride for Prime Minister Johnson and there could be a lot of factors that could come into play before the bill comes to be adopted by the lawmakers. There are still several irritants in the draft that Prime Minister Johnson and other lawmakers do not see eye to eye with and will require several parliamentary sessions to arrive at a consensus. However, given the gravity of the situation, it is more likely that lawmakers from both sides will make efforts to arrive at a consensus even if some concessions have to be granted from both sides.

The United States - China Trade war situation – The Trade war situation between China and the United States of America has been brewing for some time. Both the countries have been imposing tariffs and counter tariffs on each other’s goods leading to a troublesome impact on the world economy altogether. While other countries and economic regions have not been directly impacted, their association with the Chinese and the United States economy means that some of the fallout of this trade war is impacting them as a contagion. China, which is one of the largest importers of basic raw materials, has seen a drop in demand as it is difficult to find market for its intermediate and final goods. As a consequence, many economic regions, which derive a significant portion of their revenues from their exports of basic raw materials to China are also facing a slowdown. So also, is the case with incremental capital investments that were destined for China, which are now being withheld on account of the worsening economic conditions.

The situation between both the countries has improved significantly in the past few months, with both of them taking initiatives to work out a suitable arrangement which will benefit both the parties. The American side in September 2019 had announced that they would be withholding certain tariffs that were supposed to be imposed on Chinese goods scheduled for October 2019, in exchange for American financial institutions getting greater access into the vast Chinese marketplace. These improving conditions have instilled confidence among investors who have now started to look at equity markets more positively and either are in the process of or have already started to take positions.

Given the improving economic conditions around the globe, most institutional investors and fund managers have been signaling towards a good performance in the capital markets in the coming year. These institutional investors and fund managers have unanimously stated that the equities on the London Stock Exchange currently look the best with enough value creation potential. The long adverse economic headwinds marred by Brexit and the increasing weakness of the British Pound Sterling had ensured that British equities traded at a discount for too long and their valuations become cheap over the period. Should the British Pound continues to move up against major currencies of the world and the international institutional investors and fund managers staying true to their words, this year could bring a Santa’s rally to the cheers of all participants at the London Stock Exchange and other quarters of the British economy and its citizens.


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