Rally around the new year
'Let us have your view,' asked a reader the other day. 'Are we set for a rally on the market at last or is this just another blip?'
The answer is that we are indeed set for another rally but not because of hopes that interest rates are headed further down or because i-stock punters seem to want more punishment from Nasdaq or any of the other reasons so widely quoted on the street.
The real reason is a local phenomenon known as the Lunar New Year Rally. We are coming to the time of year when, for some unfathomable reason, investors suddenly feel more bullish about the Hong Kong stock market than they do at any other time of year.
The chart tells you the story. It is constructed by taking the daily closes of the Hang Seng Index all the way from the beginning of 1976 to the end of last year. Each year is then separated and started from a new index base of 100. The identical dates of all 24 years in the sample can then be taken together to arrive at an average year for the Hang Seng Index. The results tell you that over the period the index has on average risen by 22.9 per cent a year, which is a very good return.
It does not work every year of course. In 1982 you would have got only HK$56 back at the end of the year for every HK$100 you put in at the beginning and only HK$68 in 1994 but then other years you would have done much better, HK$217 in 1993, for instance.
More important immediately, however, is that the chart shows you it is not a steady gain throughout the year. Half of it comes in just seven weeks of the year. Those seven weeks start on December 19, give or take a few days, and end on February 6, give or take a few days. You get a little more if you hang on until the beginning of March.
The chart also says that if you are not in the market by August you probably do just as well to wait until December again. You make little gain in those intervening months. The 'summer doldrums' it is called and rightly so. Now why should all this be?
The common answer is that the end of the year rally is a lunar new year phenomenon because employees traditionally get bonuses at that time and they are also feeling happier during the holiday period.
It may serve as an answer but the lunar new year moves back and forth between January and February, which is late in the rally period, and clearly Christmas plays a role here too. Many employees now get their bonuses at Christmas and the feel-good factor operates here too.
An ancillary reason may be that fund managers, who are under-invested in December and think their clients may object to having missed out on one of the year's better performing markets, 'window dress' their funds through purchases that a glance at their year-end report will make it seem they were there all along. In most years this has meant 'window dressing' Hong Kong.
Pick your own reason. The facts are that the Lunar New Year Rally does exist as a real phenomenon of the market and it will be upon us in a matter of days. Going by the record of the last 24 years the Hang Seng Index should be about 1,500 points higher in early February than it is now.
And that record is as good a reason to predict a rally as any of the pseudo-analytical talk on the street.
Christmas cheer has a special meaning in this town. Have a good one.
Graphic: mon08gbz
