Will Kospi see Santa Claus rally this year?

With the benchmark Kospi roaring back over the 4,100 mark Friday following a nearly monthlong wobble, expectations for a year-end “Santa Claus rally” are building across the market.

The Kospi partly regained its footing Friday, closing at 4,100.05, above the 4,100 mark for the first time since Nov. 13. The feat came just two trading days after the index reclaimed the 4,000 mark Wednesday.

The index — which staged an unprecedented rally earlier this year — turned sluggish through November, as offshore investors, who had been pivotal in driving the gains, shifted to a selling stance and dumped nearly 15 trillion won ($10.2 billion) of shares on the bourse, constituting the largest monthly net selling by foreigners on record.

Despite the setback, market analysts project the Kospi to finish the year on a firmer footing, expecting that foreign investors will return to the market.

Confirming the expectations, offshore investors have already resumed net buying on the Kospi this month, purchasing over 2 trillion won worth of shares in just five trading sessions to date.

“The heavy foreign selling from last month was likely a result of profit-taking, following short-term overbuying in the second half of the year,” IBK Investment & Securities analyst Byun Jun-ho said, viewing the move as temporary rather than part of a broader trend.

“Signs that the won’s depreciation against the dollar has partly eased could help alleviate foreign-selling risks and serve as a supportive factor for the market,” Byun added.

The Kospi had lost some of its appeal to overseas investors after the local currency tumbled to 1,480 won per dollar last month. When the won weakens, foreign investors typically offload existing holdings to avoid currency losses and delay fresh purchases, rather than stepping in to buy the dip.

The won, however, has been posting a limited recovery against the dollar, climbing back to the upper 1,460 range this month. The won was quoted at 1,468.8 per dollar as of the daytime trading close on Friday.

Market analysts project the Kospi could climb as high as 4,240 in December, which would top its previous record high of 4,221.

Expectations for a US Federal Reserve rate cut are also adding to hopes for a year-end upswing. According to the CME FedWatch Tool, markets broadly anticipate the Fed to lower its target rate by 25 basis points at its upcoming meeting. A Fed cut would narrow the Korea-US rate gap, encouraging investors to increase their exposure to the domestic equity market.

“The resumption of liquidity supply in the US could help fuel a Santa rally in the domestic market,” said Yuanta Securities analyst Kim Yong-gu.

The Kospi has staged a year-end surge almost every other year over the past several years, effectively welcoming a Santa Claus rally on a biennial rhythm.

Since 1998, the Kospi has finished December in positive territory 16 times, recording an average monthly return of 2.2 percent.

The pattern is even more pronounced in years when the market is bullish.

The Kospi has posted an annual gain of more than 20 percent in 10 different calendar years over the period, and in eight of those years, the index went on to notch additional gains in December. The average December return during those bull-market years was 6.9 percent.

Given that this year has marked one of the strongest rallies for the Kospi, with the index soaring more than 70 percent from January through October, the market widely expects further gains in December.

“In bull-market years, the upward momentum tends to hold firm through the end of the year,” said Byun from IBK Investment & Securities.

“Given that this year has been one of the strongest bull markets on record, the likelihood of a Santa rally in December appears high.”