Global investors and the January effect

By Sola Oni

Sola Oni, an integrated communications strategist, Chartered Stockbroker and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications. You can reach him at onisola2000@yahoo.com

As we ascend the ladder of 2022, global investors are preoccupied 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 a 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 in other months. Academics are believed to have  later confirmed the theory,  following the behaviour of stocks and other asset classes in every January. 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 effects 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 outperform large-caps during January.

But popular as the Theory of January effect appears, it is not without some inherent weaknesses. In every market, institutional investors tend to have stronger capacity to influence 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 of The Nigerian Stock Exchange (now NGX ) 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 and African markets. But The Exchange’s  performance in January 2021 proved January effect theory wrong. The total transaction value amounted to N232,46 billion, a 13.7 5 percent 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 percent compared to N69.92 billion posted in December and 32.4 percent 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 frontline provider of online financial analyst certification programmes, 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 percent while Austria was down five percent. 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 decisions.

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