Does Jan­uary de­ter­mine the rest of the year?

Business Day (Nigeria) - - Economic MONITOR - AMAMCHUKWU OKAFOR

Jan­uary, the first of the seven months with thirty one days eas­ily passes as one of the strong­est months of the year. This is be­cause it fol­lows the busi­ness cal­en­dar of most or­gan­i­sa­tions and house­holds. In the month, new strate­gies are ini­ti­ated; tax plan­ning, re­cruit­ment, cost cut­ting ini­tia­tives, re-in­vest­ment de­ci­sions and bud­get im­ple­men­ta­tion. Some be­lieve that Jan­uary de­ter­mines the rest of the year. This phe­nom­e­non has been broadly cap­tured as the Jan­uary Ef­fect.

Jan­uary Ef­fect is a hy­poth­e­sis that there is a pat­tern of sea­sonal anom­aly in the fi­nan­cial mar­ket where the prices of se­cu­ri­ties in­crease in the month of Jan­uary more than in any other month. It is has been de­scribed as the par­tic­u­lar ten­dency of small-cap stock to rise es­pe­cially be­fore the mid­dle of the month. Even though there are data ev­i­dence that sug­gests the Jan­uary Ef­fect has be­come less prom­i­nent as mar­kets have cor­rected for the in­ef­fi­ciency, Jan­uary still comes with a lot of dra­mas – po­lit­i­cal and eco­nomic.

Global en­vi­ron­ment - US

Eq­ui­ties mar­kets glob­ally got off to a good start in 2018 as gains recorded by key in­dices sug­gested mo­men­tum for a strong year. How­ever, global eq­ui­ties mar­kets ended the first half of the year rel­a­tively flat, ad­vanc­ing slightly on av­er­age from the pre­vi­ous year’s close. De­spite the largely op­ti­mistic broad out­look on global growth (with the IMF re­vis­ing its global growth fore­cast for 2018 up­wards to 3.9% in April, from 3.8% ear­lier pro­jected); global mar­kets con­tinue to face the drag ef­fects from trade pro­tec­tion­ism sen­ti­ments and pol­icy nor­mal­iza­tion by sys­temic cen­tral banks.

By the end of the year 2018 into the New Year, mar­kets were reacting to the fourth and fi­nal (for the year) hike in the fed­eral funds rate for the year from 2.25 per­cent to 2.5 per­cent. Ef­fec­tive to the ex­pec­ta­tions of rate hike, the S & P 500 fell by 2.5 per­cent to 2,530.54 ba­sis points on Mon­day 19, 2018. The broad mar­ket in­dex fin­ished the ses­sion low, 2 per­cent at 2,545.94 ba­sis points, its low­est close for the year. The Dow Jones In­dus­trial Av­er­age lost 507.53 points to close at 23,592.98, bring­ing its two-day losses to more than 1,000 points. With shares of Ama­zon and Gold­man Sachs lead­ing the de­clines, the Dow and S & P 500 closed Mon­day down 7.6 per­cent and 7.8 per- cent this month, re­spec­tively.

In as much as the trade war be­tween the US and China con­tin­ues, Trump goes to a po­lit­i­cal war against the Se­nate over $5.7 bil­lion bud­get fund­ing for the wall around the Mex­i­can bor­ders. This stale­mate de­gen­er­ated into a par­tial govern­ment shut­down that has car­ried over into the New Year. The shut­down which is the third since the Trump ad­min­is­tra­tion im­plies that 25 per­cent of US fed­eral govern­ment has no fund­ing, nine de­part­ments in­clud­ing Home­land Se­cu­rity, Jus­tice, Hous­ing, Agri­cul­ture, Com­merce, In­te­rior and the Trea­sury have been af­fected, Na­tional Parks and Na­tive Amer­i­can tribes not spar­ing. Cur­rently, over 800,000 work­ers have been fur­loughed.

None­the­less, mar­kets are be­gin­ning to re­bound fol­low­ing the state­ment of the Fed chair, Jerome Pow­ell to be pa­tient and data driven about fu­ture rate hikes. The out­come of the ne­go­ti­a­tions be­tween China and the US on trade pro­tec­tion would as well as the res­o­lu­tion on by the US Se­nate on the wall bud­get would de­ter­mine in most part the rest the year.

Do­mes­tic en­vi­ron­ment – Nige­ria

The Nige­rian eq­ui­ties mar­ket was not left out of the New Year frenzy in 2018 as it ex­tended its prior year’s rally buoyed by ris­ing crude oil prices, and for­eign ex­change (FX) liq­uid­ity. In­vestors re­tained an op­ti­mistic view of the Nige­rian mar­kets; hinged on a pos­i­tive eco­nomic out­look - with strength­ened GDP growth ex­pec­ta­tions of 2.5% for 2018 (as fore­casted the World Bank).

In Q1 2018, the av­er­age daily value traded across all prod­ucts on the NSE, in­creased by 96.31 per­cent to N6.98 bil­lion ($ 22.84 mil­lion), from N3.56 bil­lion in the pre­vi­ous year, 2017. Sim­i­larly, the av­er­age daily vol­ume traded in­creased by 125.17 per­cent to 695.65 mil­lion units in Q1 2018, from 308.94 mil­lion units in Q1 2017; while the num­ber of trans­ac­tions recorded dur­ing the quar­ter rose by 113.56 per­cent.

At the end of Q1 2018, the av­er­age PE ra­tio of The Ex­change’s listed eq­ui­ties stood at 24.91 com­pared to 18.83 in the pre­vi­ous year. The eq­uity turnover ve­loc­ity also in­creased by 1.44 per­cent­age points to 11.72 per­cent, from 10.28 per­cent in Q1 2017. The div­i­dend yield for the 52-week pe­riod ending March 29, 2018 was 4.61 per­cent, com­pared to 5.97 per­cent for the pre­vi­ous year.

Global risk off sen­ti­ments amid un­cer­tainty in the global fi­nan­cial mar­kets as well as un­cer­tainty with re­gards to Nige­ria’s 2019 elec­tions brought in some level of mod­er­a­tion through­out the year. As at Jan­uary, re­turns were about 15.98 per­cent and it dropped to 7.91 per­cent in April and by May the mar­ket re­turns en­tered the neg­a­tive ter­ri­tory (-0.36 per­cent).

The poor per­for­mance of the mar­ket (ASI) was mir­rored across the sec­tors of the NSE, al­though in dif­fer­ent mag­ni­tudes. The fi­nan­cial sec­tor’s per­for­mance tracked by move­ments in the bank­ing and in­sur­ance in­dices shows that the fi­nan­cial sec­tor rel­a­tively out­per­formed the mar­ket. The ASI av­er­aged around -2.71 per­cent in 2018 com­pared to the av­er­age of -0.86 per­cent in the bank­ing in­dex and 1.18 per­cent recorded in the in­sur­ance in­dex. The bet­ter per­for­mance of the fi­nan­cial sec­tor re­flects its re­silience amidst the down­turn due to the level of liq­uid­ity usu­ally main­tained in the sec­tor.

In H1 2018, the in­dus­trial sec­tor av­er­aged 9.12 per­cent to out­per­form the mar­ket (7.57 per­cent). How­ever, in H2 2018, the trend re­versed as sell-offs in the in­dus­trial sec­tor dropped av­er­age re­turns to -24.96 per­cent com­pared to the mar­ket per­for­mance of -13.1 per­cent. The con­sumer goods sec­tor was the worst per­form­ing sec­tor on the NSE in 2018 av­er­ag­ing re­turns of -10.13 per­cent in 2018. The poor per­for­mance of the sec­tor has mostly been at­trib­uted to the lack of for­eign ex­change in H1 2018 and the re­sult­ing in­crease in the cost of raw ma­te­ri­als.

The re­turns in the oil and gas sec­tor av­er­aged -2.68 per­cent in 2018 com­pared to the mar­ket re­turns of -2.71 per­cent. The re­cov­ery in crude oil prices in mid2018 boosted in­vestors’ sen­ti­ment to the sec­tor as SEPLAT en­joyed the most gain due to its op­er­a­tion in the up­stream busi­ness.

Con­clu­sion: First trad­ing week 2019

As the pre­ced­ing analy­ses for 2018 show, the do­mes­tic econ­omy does not seem to play to the forces of the Jan­uary Ef­fect as sweep­ing global and do­mes­tic so­ciopo­lit­i­cal fac­tors act to al­ter the tra­jec­tory be­yond Jan­uary. The stock mar­ket in the first trad­ing week of 2019 seemed to have been bear­ish as the NSE-ASI de­pre­ci­ated by 1.28 per­cent while mar­ket cap­i­tal­iza­tion ap­pre­ci­ated by 0.78 per­cent to close the week at 30,638.90 and N11.426 tril­lion re­spec­tively. The sen­ti­ments are due to the forth com­ing elec­tions in Fe­bru­ary as well as the un­cer­tainty sur­round­ing global oil prices and the de­ci­sion of OPEC on pro­duc­tion cuts. The rest of the year largely rest on the out­come of the elec­tion more than what hap­pens in Jan­uary alone.

Eq­uity Turnover

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