Does January determine the rest of the year?
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.