Global Investors and the January Effect

As we ascend the ladder of 2022,  global investors are pre-occupied with the issue of asset allocation and stock pick. January, the first month of the year is symbolic in investment parlance. The month is globally associated with general rise in stock prices. January is characterized by many variables, including  consumer sentiment, tax-loss harvesting in December, and employees’ investing of year-end- bonus on stocks in January, thus causing spike in stock prices. The theory of the January effect emanated in 1942, when a celebrated investment banker Sidney Wachtel noticed that stock prices tended to rise in January  more than other months. Academics are believed to have later confirmed the theory, following the behaviour of stocks and other asset classes in every January. 

A Post Santa Rally 

The January effect is also driven by the perception that some astute portfolio managers and fund managers “window dress” their portfolios by dumping laggards in December to avert disclosure in the fund’s annual report and invest heavily in January to drive returns. January effect is also said to impact more on small cap stocks than their large cap counterparts as small caps are largely illiquid.  At the beginning of the year, many investors begin on a clean slate to invest for the future. This can lead to upswing in demand with attendant effect on the stock prices. The average return for stocks during January was approximately five times greater than any other month according to a study that analyzed data between 1904 and 1974. This is corroborated by  Salomon Barney’s analysis between 1972 and 2002 which revealed that small cap stocks outperformed large-caps during January.

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Busting a Theory

But popular as the Theory appears, it is not without some inherent weaknesses . In every market, institutional investors tend to have stronger capacity to influence the market direction. It is therefore debatable that the aggregate sell-off by individual investors in December or purchase in January can alter the market equilibrium. In the United States, the January effect is no longer consistent with the markets. Asset classes behave differently in January. The All-Share Index (ASI) of the Nigerian  Exchange Limited (NGX formerly NSE) ended bullish in December 2020, as the best performing worldwide according to Bloomberg which monitored 93 global equity indices. The Exchange posted  +50.03 % to surpass S & P 500 ,-16.26 %, Dow Jones Industrial Average, +7. 25 %, among other global African markets.

But the Exchange’s performance in January 2021 proved the January effect theory wrong, The total transaction value amounted to N232,46 billion , a 13.7 5 decline compared to N269.24. billion recorded in December. Similarly, total foreign equities transaction in the review period was N47.52 billion, a decline of 32 % compared to N69.92 billion posted in December and 32.4 % recorded in the corresponding period of 2020. The uninspiring performance has nothing to do with the market’s strong fundamentals. It only reflected profit taking by investors in an operating environment characterized by uncertainties. However, the uninspiring performance is at variance with the January effect theory. Some investors have argued that if the  January effect was real, every investor would buy stocks in December and sell in January to take advantage of capital gain.  Others have fingered the long-term data flaunted to defend the theory as misleading as it relied on occurrences of many years ago.

A Teachers Take

A frontline provider of Online financial analyst certification Programme, Corporate Finance Institute (CFI), in a recent study noted that January 2020 meant different things to investors. According to the Institute, while investors realized positive returns in 10 out of 23 countries within the World Index of Global Developed Market, they lost in 13 others. The study stated that in January 2020, Portugal was up 6.2 % while Austria was down, 5%. It offers timeless investment advice on the January effect saying: “As an investor, it is important to understand the fundamentals of a company to be better equipped when making decisions during the January spike. It involves researching the company’s financial health, such as revenues, growth potentials, and profit margins, along with other aspects such as management, market position and more”. As we anticipate what the market will post in this new month, investors should move closer to their stockbrokers for sound investment advice to hedge against risks associated with investment decision.

Oni, an integrated Communications Strategist, Chartered Stockbroker, and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications.

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