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The January Effect - Fact or Fiction?

Category: Capital Market


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The January Effect - Fact or Fiction?

  January 16, 2012

 

 “A general increase in stock prices during the month of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off.” - Investopedia

 

At the close of 2011, most financial markets closed on a pessimistic note. It is noteworthy that this was a continuation of the trend all year long.



Two weeks into the New Year, the mood and sentiment should have changed for the better but alas, we have had to contend with an untimely announcement from the Federal Government which came on January 1, 2012 that the fuel subsidy would end immediately as part of efforts to cut government spending .
 

This action led to popular revolt and a nationwide strike that basically shut down the economy for about 8 days.
 

While profitable transactions permeated market activities as seen in the ASI being up by 0.82% YTD, this was against the background of skeletal trading activities where Volume traded on the floors was significantly reduced. 
 

Internationally, the markets have fared well in January 2012. The S&P 500 is up 3% for the year, the Euro zone debt crisis has yet to make new headlines and commodities have also performed well. 
 

A well-documented phenomenon in financial markets is what is known as the January effect. Historically, risk assets perform best during the month of the January. They perform better in January relative to any other month of the year. The January effect is said to affect small caps more than mid or large caps. This historical trend, however, has been less pronounced in recent years because the markets have adjusted for it. Another reason the January effect is now considered less important is that more people have no reason to sell at the end of the year for a tax loss.
 

The January Effect is particularly intriguing because it doesn't appear to be diminishing despite being well known and publicized for nearly two decades.

There are many reasons for this.

*     One is that many investors sell assets during December for tax reasons, and then buy again in January. It is more pronounced for small cap and mid cap stocks than for large cap stocks.

*    Many investors tend to take new positions at the start of a year rather than towards the end of a previous year. 
 

January Effect and the Nigerian Stock Exchange
  

The January effect on the Nigerian market was evident in the early days when it recorded positive returns. The real challenge is the rate at which it quickly went down once the strike was called off. In the weeks ahead, we will monitor the market to report on how the market responds – and confirm if it is a myth or something we should take seriously in our market.
 

Suffice to say, a heightened level of uncertainty promises to cloud the market space in Q1 2012 in the least. Economic Fundamentals were bad to begin this year http://www.proshareng.com/news/15957 and a key point to note is that many factors have changed from a fundamental perspective.  
 

Time line of developments in the Economy

1.    Committee to speed up passage of PIB to be inaugurated on 190112

2.    FG suspends electricity tariff hike

3.    Presidential Broadcast, Monday, January 16, 2012

4.    US Issues Travel Warning on Nigeria

5.    Statement from Mrs. Diezani Alison-Madueke on fuel subsidy removal

6.    2012: Being Competitive amidst Heightening Uncertainty

7.    The Fraud in the Oil Industry by Sanusi Lamido

8.    KPMG report says NNPC is a house of corruption

9.    Oil Sector Corruption – The AP/NNPC Saga Revisited (2003)

10. Auditor General alleges distortions in Federation Account

11. Nigeria strikes costing economy $617 million a day-CBN

12. Oil up $2 on Nigeria output threat

13. SA might issue Nigerian travel alert

14. Nigeria union orders oil, gas shutdown from Sunday

15. Foreigners join protest in Nigeria

16. Foreign airlines suspend operations to Nigeria over strike

17. Mr President, Wahala Dey! - The Choice Before Jonathan (2)

18. Nigeria Losses N82 Bn Daily to the Strike – LCCI

19. Cashless: CBN postpones restriction on third party cheques till March

20. What is Nigeria's Boko Haram?

21. Property market ends 2011 with subdued demand, slow developments

22. Is investing in oil stocks safe post Fuel Subsidy Removal?

23. Fuel Subsidy: Impact on Oil Marketing Companies on the Bourse
 

Disclaimer/Advice to Readers:
While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the author’s best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This information is published with the consent of the author(s) for circulation in/to our online investment community in accordance with the terms of usage. Further enquiries should be directed to the author –
analyst@proshareng.com. 

 



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