Global investors and the January effect

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Tuesday 04 January 2022 / 10:19 / By Sola Oni, OpEd / Header image credit: Investment U

As we move up the 2022 ladder, global investors are concerned with the issue of asset allocation and stock selection. January, the first month of the year, is symbolic in investment jargon. The month is generally associated with a general rise in stock prices. January is characterized by many variables, including consumer confidence, the harvest of tax losses in December and the investment by employees of end-of-year bonuses on stocks in January, thus sparking prices. actions. The January effect theory originated in 1942, when a famous investment banker Sidney Wachtel noticed that stock prices tended to rise in January more than other months. It is believed that academics later confirmed the theory, following the behavior of stocks and other asset classes in January of each year.

A rally after Santa Claus

The January effect is also due to the perception that some clever portfolio managers and fund managers ‘showcase’ their portfolios by eliminating laggards in December to avoid disclosure in the fund’s annual report and invest heavily in January. to generate returns. The January effect would also have a bigger impact on small-cap stocks than their large-cap counterparts, as small caps are largely illiquid. At the start of the year, many investors leave a clean slate to invest for the future. This can lead to a recovery in demand with a correlative effect on stock prices. The average stock return in January was about five times that of 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 found that small cap stocks outperformed large caps during January.


Breaking a theory

But as popular as Theory seems, it is not without some inherent weaknesses. In each market, institutional investors tend to have a greater ability to influence the direction of the market. It is therefore debatable whether the massive sales by individual investors in December or the purchases in January could alter the market balance. In the United States, the January effect is no longer consistent with the markets. Asset classes behave differently in January. The All-Share index (UPS) of the nigerian Limited exchange (NGX formerly NSE) finished bullish in December 2020, as the top performer in the world according to Bloomberg, which has monitored 93 global stock indices. The stock market posted + 50.03% to overtake the S&P 500, -16.26%, the Dow Jones Industrial Average, +7. 25%, among other global African markets.

Corn tThe stock market’s performance in January 2021 proved the January effect theory to be wrong. The total value of the transaction was 232.46 billion naira, a decrease of 13.7% from 269.24 naira. billion recorded in December. Likewise, total foreign equity transactions during the review period amounted to N47.52 billion, a decrease of 32% from the N69.92 billion posted in December and 32, 4% recorded in the corresponding period of 2020. The interest-free performance has nothing to do with strong market fundamentals. It only reflected the profit taking of investors in an operating environment characterized by uncertainties. However, the uninspiring performance is at odds with January’s theory of effect. Some investors have argued that if the January effect is real, every investor would buy stocks in December and sell in January to take advantage of a capital gain. Others have pointed to the long-term data displayed to defend the theory as being misleading because it was based on events from many years ago.

A hold of professors

A frontline provider of the online financial analyst certification program, Corporate Finance Institute (CFI), noted in a recent study that January 2020 means different things for investors. According to the Institute, while investors achieved positive returns in 10 of the 23 countries in the Global Developed Markets Index, they lost in 13 others. The study indicated that in January 2020, Portugal was up 6.2% while Austria was down 5%. He offers timeless investment advice on the January effect saying: “As an investor, it is important to understand the fundamentals of a business to be better equipped when making decisions during the January peak. This involves looking for the financial health of the business, such as revenues, growth potentials and profit margins, as well as other aspects such as management, market position, etc.. As we anticipate what the market will release in this new month, investors should approach their stock brokers for sound investment advice to protect against the risks associated with making the investment decision.

Oni, Integrated Communications Strategist, Certified Securities Broker and Commodity Broker, is the President and CEO of Sofunix Investment and Communications.

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