Statistical studies suggest that equity market returns in January are a precursor of the performance over the next 11 months of the year. Hence, the conventional market wisdom that “as goes January, so goes the year”.
During the 64-year period from 1950 to 2013, a positive performance of the S&P500 Index in the US during the month of January led to a positive return during that same calendar year for 92.5 per cent of the time. However, the January stockmarket barometer is not as accurate during a downward trend. In fact, a negative January resulted in a weaker year for equity markets in only 54 per cent of the cases. While the January barometer is not as accurate during a negative start to the year, the performance across many global equity markets during January 2014 could be a cause for concern for many investors.
The main equity markets suffered declines during the start of 2014 with the worst performer being Japan’s Nikkei 225 Index with a drop of 8.5 per cent. In the US, the Dow Jones Industrial Average slipped 4.9 per cent lower and the S&P 500 shed 3.6 per cent. Meanwhile, the Nasdaq Index, which encompasses technology companies, suffered a weaker decline of 1.7 per cent during the month of January. In Europe, the worst performer was the UK FTSE 100 Index with a drop of 3.5 per cent followed by the French CAC40 (-3 per cent) and Germany’s DAX30 (-2.6 per cent). The Swiss market index registered a minimal decline while Spain’s IBEX 35 Index performed slightly positive. The outlier was Italy’s FTSE MIB Index with an increase of 2.4 per cent.
What led to such a weak start to the year? Many financial commentators adopted a cautious approach at the start of the year following the extraordinary gains registered during 2013 when Japan’s equity market surged by 57 per cent and the S&P 500 in the US gained 29 per cent. At the start of the year, many international economists had cited various challenges that may impact equity markets during 2014. Among these, there was debate on whether the Federal Reserve will be able to adjust its monetary easing appropriately and whether the Chinese economic performance will impact emerging markets.
In fact, one of the key highlights during the first few weeks of 2014 was the sell-off across emerging markets and the significant declines across many currencies. An index tracking emerging market shares declined by seven per cent during January – the worst January performance since 2008.
The decision by the US Federal Reserve to reduce its monetary stimulus first announced in December and again in January caused further instability across emerging markets which were already suffering from very high levels of inflation, trade deficits and in some cases also political turmoil. Emerging market economies experienced a significant cash inflow in recent years as a result of the extraordinary easing policies by the US Federal Reserve and other central banks. With the Federal Reserve cutting back on its monthly asset purchases, yields on US government bonds rose from 1.6 per cent in May 2013 on a 10-year bond to 2.7 per cent in January 2014. This increased the attractiveness of US government debt, leading to a reversal of investment flows out of emerging markets and into the US. This brought about a sell-off in many emerging market currencies such as Turkey, India, Brazil, Argentina, South Africa, Russia and others. One of the more extreme cases was the drop in the Turkish lira by 7.3 per cent during a brief period in January. The sudden drop required immediate action by the Turkish Central Bank which in an unprecedented move hiked interest rates by 425 basis points from 7.75 per cent to 12 per cent in a bid to support the ailing currency. Other central banks across some emerging markets replicated such intervention although not to the same extent as the Turkish central bank.
In addition, the publication of Chinese economic data suggesting slowing growth in the world’s second largest economy also impacted emerging markets. Moreover, weak corporate earnings from some US multinationals together growing deflation risks across the eurozone led to a sell-off across the more developed equity markets.
Trading volumes remained health during the first month of 2014 exceeding the €5 million mark
So how does the January stockmarket barometer fare in Malta? An analysis of the performance of the MSE Share Index since its inception in December 1995 shows that in 72 per cent of the cases, a positive or negative performance in the Index for the month of January led to a similar performance for the year. This barometer did not function for only five of the past 18 years (1997, 2006, 2009, 2011 and 2012).
During January 2014, the local equity market registered a mild improvement of 0.5 per cent to 3,703.617 points. The MSE Share Index approached fresh three-year highs as 14 out of the 21 equities on the Official List of the Malta Stock Exchange closed the month in positive territory. Despite the large majority of positive performing equities, the January returns were mild due to the declines in two of the three large caps, namely HSBC Bank Malta plc and International Hotel Investments plc. HSBC’s share price dropped 1.5 per cent to €2.56 on relative caution ahead of the publication of the 2013 annual financial statements due on February 24. Meanwhile, the equity of IHI gave back some of the strong gains registered during the final days of 2013. IHI’s share price has been an under-performer in recent years possibly due to the delay with respect to the sale of the London apartments.
Trading volumes remained healthy during the first month of 2014 exceeding the €5 million mark for the third consecutive month. The total value of equity trades amounted to €5.6 million in January with Bank of Valletta plc and HSBC Bank Malta plc shares accounting for 37.25 per cent (equivalent to €2.1 million) and 18.91 per cent (equivalent to €1.1 million) of this activity respectively.
However, while HSBC eased lower during January, BOV’s equity gained 2.9 per cent to €2.479 as demand for the bank’s shares was sustained probably due to the rating confirmation by Fitch Ratings at BBB+ with a stable outlook. When adjusted for the bonus share issues which took place on an annual basis over the past seven years, BOV’s share price is approaching its highest level in the past six years. This is probably very much unnoticed by many investors.
The best performer in January was Middlesea Insurance plc with an 11.1 per cent jump (the only double-digit increase) to the €1.00 level but activity was weak reflecting the tight shareholding structure and the few shares in public hands.
The most notable developments were those related to Go plc (+3.5 per cent) and FIMBank plc (+0.5 per cent). Go accepted to further support Forthnet SA (through Forgendo Ltd, its joint venture with Emirates International Telecommunications Ltd) by participating in the €30 million rights issue of the Greek telecoms operator.
In the meantime, Burgan Bank and United Gulf Bank became majority shareholders in FIMBank after acquiring a further 30.36 per cent stake in the trade finance specialist through the joint voluntary bid thereby raising their combined shareholding to 80.14 per cent. As a result, FIMBank have requested the Listing Authority to maintain its listing status.
Although the January barometer could provide some useful insight on the expected market performance for the coming year, an investor should always base his trading strategy on his risk profile and overall investment objectives.
Following the strong gains registered by many equities last year, the start of the reporting season in the coming weeks and other individual company initiatives and developments will largely influence the performance of the equity market in the coming months.
Any disappointing financial performance and lack of newsflow on forward guidance will likely lead to a softening share price in certain instances. Naturally, another key factor closely monitored by local investors is the extent of any dividend distribution and this is another element that can shape individual equity performances during 2014.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC, on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising from the use of all or any part thereof, and no representation or warranty is provided in respect of the reliability of the information contained in this report.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.