Andrew Webb: The january effect

You may have come across the annual round of commentary these past few weeks that ponders the ‘January effect’. In fact, there seem to be two January effects.

The first is a theory that stocks rise in January because buyers join the market in the new year for tax reasons. The same theory suggests that stocks fall in December. The second theory is that January is a barometer for the rest of the year – if stocks rise in January, the year as a whole will be positive.

Both theories are, of course, bunkum. Sometimes stocks rise in January; sometimes they fall. Sometimes the year ends in the same positive or negative territory as it ended January; sometimes it does not. Analysis can be found to support and deny both theories and you should pay no attention to any of it. Ask yourself what is going to have a greater impact on stock prices this year: sentiment in January or any of the monumental economic and political cyclones that are swirling around 2012.

The dangers of backing a single theory, whether it is a crackpot myth like the January effect or a sensible idea based on sound reason, were made clear last year.

A year ago, we asked our private investors which asset class they thought would do best in 2011. A vast number of them, about 60 per cent, said emerging markets. And who would have argued against that? High-income economies with large debts were facing lumpy recoveries and the Far East, led by China, was roaring along.

In the end, China fell about 20 per cent last year and the surprise star performer was the US, which, as you can see in the chart in dollar terms and with income reinvested, held its ground.

This does not mean to say that investors should not look forward and make any predictions at all, but they should limit their fortune telling to two areas. First, they should look at themselves in the crystal ball to understand what they need from their investment portfolio in the future – how much money and by when.

For most people, the goal will be a long and comfortable retirement which provides a usefully distant investment horizon. Second, they should look for the long-term investment and economic themes that might carry them to their goal over those many years.

Shift

Among these are the inevitable economic shift from West to East, the rising spending power of hundreds of millions of emerging market consumers, changing demographics that means a growing global population is living longer, healthier lives, and the vast investments that are being made in infrastructure across the world as the West replaces and upgrades its creaking networks and the developed world builds and connects the cities of the 21st century. Any and all of these themes have the potential to make investors richer.