iFund- Let’s see if January effect works in Hong Kong stock market?

2019-03-19 10:10
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Our findings suggest that January is not a good predictor of full year performance of Hong Kong Stock market as only 47% of the time has correctly predicted the full year performance since 2000. Nevertheless, despite January effect has applied well for small cap companies in Hong Kong, there is no guarantee that the market will follow this anomaly year after year.

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January effect is a very famous seasonal investment strategy in investment world as the theory suggests that stocks equity performance in January on average, in particular US markets, is higher than in the rest of the year. Some researchers even extends the theory to that January is also a good predictors of full year performance. Besides, researchers like Keim (1983) suggests that January effect was especially valid for small cap stocks as largely explained by tax-loss selling. This is because individual investors tend to disproportionately hold small stocks, and they tend to sell those loss-making stocks for tax reasons at the end of the year, and reinvest during the first month of next years. Alternatively, various empirical studies advocate that the January effect was a result of “window dressing” by institutional and professional investors, while others explain that this was led by investors who have been using year-end bonuses to purchase new investment during the first month of the year.

Is there a January effect for Hong Kong stock markets?

January effect so far has played out quite well this year as the U.S. stock markets have performed exceptionally good since the beginning of 2019, with S&P500 and Russell 2000 index increased by 5.3% and 7.8% YTD respectively. Likewise, Hong Kong Hang Seng Index and Hang Seng Small Cap Index also increased by 4.6% and 4.4% during the same period. So, one of the most frequently asked question is: does January effect investment strategy works well in Hong Kong stock market?

 

According to our study of Hong Kong Hang Seng Index over the last 40 years (1979-2018), the average monthly return in January was 1.9% and the outperformance margin was 0.7% if compared to the 1.2% average return for all months during the period. However, we found out that the positive return was actually skewed more in early years, while the effect has become less pronounced in recent years. The average January return has been negative 0.5% since 2000 vs. +0.4% for all months.  On the other hand, our findings suggest that April and July have the two highest average return both in longer (1979-2018) and recent periods (2000-2018). Besides, each of them also has more months of positive return (30 months and 27 months) than January (23 months) and others.

Figure 1. January Effect looks valid during 1979-2018…

*Figures in brackets refer to % of months with positive performance

Source: Bloomberg, Noble Apex/iFund

 

Figure 2. January Effects is fading and not pronounced in recent periods.

*Figures in brackets refer to % of months with positive performance

Source: Bloomberg, Noble Apex/iFund

Is small cap outperformed large cap in January

Our findings suggest that the average monthly return of Hang Seng Small Cap Index was 1.2%, outperformed the 0.3% average return for all months, looking from 2000-2018. Besides, it has    outperformed large cap (Hang Seng Index) by 1.7% on average during the same period. This is quite impressive, in particular, the outperformance was achieved not because the general market was strong as illustrated by the negative performance of large cap companies. On the other hand, our study finds out that apart from January, small cap stocks also outperformed meaningfully in February and May than large cap companies as well as the average return for all months.

 

Figure 3. Small cap outperformed large cap in January as well as the monthly return for all months

Source: Bloomberg, Noble Apex/iFund

Last but not least, our findings suggest that January is not a good predictor of full year performance of Hong Kong Stock market as only 47% of the time has correctly predicted the full year performance since 2000. Nevertheless, despite January effect has applied well for small cap companies in Hong Kong, there is no guarantee that the market will follow this anomaly year after year. Besides, January effect is approximately a 1-2% benefit on average and the transaction costs could wipe out your return if you trade too much. Remember, investor should still do their own due diligence, while analysing the current market conditions, business fundamentals, macroeconomic, political and other risks factor should be a better way to help you to obtain a good investment return over the long run.

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