Riding on the January effect
It is that time again, where Christmas cheer is in high gear while stocks are in low gear. Most stocks on the Zimbabwe Stock Exchange have fallen to their three-month lows amid constrained liquidity, which we attribute to the holiday effect.
Axia Corporation peaked at ZWL$45,01 per share in the fourth quarter of 2021 before receding to ZWL$27,28 on December 17, 2021, while Delta Corporation’s share price shed 29% to ZWL$138,16 from its three-month high of ZWL$195,34. Econet and Innscor had similar price trends as they fell from their threemonth highs to ZWL$73,26 (-19%) and ZWL$151,84 (-26%), respectively.
The holiday effect is one of the most widely analysed calendar anomalies in stock markets.
Its best-known aspect refers to the observed fact that pre-holiday stock returns are typically higher than postholiday returns, most notably the Christmas holiday.
However, on the ZSE, the anomaly takes on a different twist especially during the festive season. Stock prices tend to dip during the Christmas holiday before rebounding shortly after the new year. Empirical evidence from various studies in different capital markets also confirm the existence of the holiday effect.
Kudryavtsev (2019) found strong evidence for the holiday effect among stocks in the S&P 500 index between 1993 and 2017, and this anomaly was more pronounced for small and more volatile stocks.
The results of this paper also concur with evidence by Kim and Park (1994) who studied the impact of the effect in the United States, United Kingdom, and Japanese stock markets. This same also holds true for African stock markets.
A paper by Kra, Brinwa, et al explored this hypothesis using two Africa ETFs, namely the VanEck Africa Index ETF and the iShares MSCI South Africa ETF. Combined, these ETFs hold equities in South Africa, Nigeria, Kenya, Zimbabwe, Morocco, and Egypt. The evidence also revealed strong evidence of the holiday effect throughout Africa stock exchanges using data spanning between 2003 and 2019. The manifestation of this effect over the festive season – usually referred to as the January effect - is often driven by several factors that include
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Profit-taking,
Funding holiday expenses,
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Speculation,
Window-dressing, and
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Tax-loss harvesting.
As the year draws closer to an end, investors cash in the profits made during the year by selling in November and December.
ZSE investors who took long positions at the beginning of 2021 in the above-mentioned stocks are in the best mood given that they beat inflation and parallel market rates.
Although these stocks’ prices were down in the final three months of the year, they were notably higher in comparison to the beginning of the year.
Axia gained 198% to date, while Delta, Econet, and Innscor were up 507%, 675%, and 310%, respectively. In comparison, CPI growth between January and November 2021 was 44% and the parallel market rates moved about 77% from about 110 to about 195 in the year to date.
The sell-off is also compounded by the need to fund leisure expenses towards year-end and speculators who are liquidating their positions in anticipation of bargain prices in the first few weeks of the following year.
In some cases, the sale of stocks in December is part of window-dressing by some businesses.
Window-dressing is a strategy used by some mutual funds and portfolio managers to improve the appearance of a fund’s performance before presenting it to clients and shareholders.
To window-dress, the fund manager sells stocks with large losses and purchases high-flying stocks near the end of the quarter or year. These securities are then reported as part of the fund's holdings.
This also extends to some corporates who borrow funds from fund managers’ positions on the stock market to window-dress their cash position in their year-end performance review. Window-dressing has been mostly documented among fund managers in developed markets, but its prevalence has declined over the years, much to the headway made in good corporate governance practices over the years.
Tax-loss harvesting also contributes to depressed share prices in December.
Towards the end of the tax year, many investors sell stocks in their portfolios that have declined in value throughout the year so that they can claim capital losses against their tax bill.
These capital losses can offset taxes on capital gains in subsequent periods.
However, this is not universal and often depends on the tax policies in the jurisdiction in question.
These holiday effects have been fading over time and especially since the 2008 global financial crisis because of an increased awareness of the anomaly. This awareness typically leads to increased buying during the last few weeks of the year by speculators who subsequently sell to investors in the first few weeks of new year, with an overall impact that closes the door of opportunity presented by the anomalies.
However, we note that the holiday effect is still prevalent on select stocks on the ZSE because the bourse exhibits weak-from efficiency according to the efficient market theory.
Unlike in more developed markets where the anomaly is more pronounced in small caps, the effect is more prominent among large cap and some midcap stocks.
Delta Corporation, for example exhibited the anomaly between October 1, 2019 and April 1, 2020 as well as in the comparable period between 2020 and 2021. We opine that Delta and several other large-and midcap stocks are currently exhibiting the January effect, and savvy speculators should be picking up fundamentally undervalued stocks at bargain prices during this time in anticipation of firmer prices in the next three months.