Will investors get a boost from the January effect?
The FTSE 100 index of the UK’s leading companies has got off to a poor start in January. But could this mean it’s a great time to start investing?
At the start of the year many investors focus on the January Effect, which is the tendency for positive markets in the first month of the calendar year to lead to positive markets in the subsequent 11 months.
It’s hard to argue against statistics that show that a positive January has led to further rises four out of five times during the past 32 years.
However, figures from Fidelity International found that in the 13 years since 1984 in which the FTSE 100 had a negative first month, the stock market went on to end the year at a higher level.
A market fall could also present an opportunity to get good value on your investments. The Chinese market falls this month are also hurting global markets, including the UK. This may look painful in the short term but could present buying opportunities.
Investors, however, should be focusing on the long term. You shouldn’t expect a quick return from the stock market over one year and should be prepared to hold your investments for at least five years to ride out any peaks and troughs.
Tom Stevenson, investment director for personal investing at Fidelity International says: “As far as short term buy signals go, the ‘January Effect’ seems to have a reasonably reliable hit rate.
However, as far as 2015 has shown, such adages should not be solely relied upon when making investment decisions.”
Instead, investors should focus on sound investment principles such as staying invested through market ups and downs, saving regularly every month and being well diversified in their investments across asset classes such as cash, equities, bonds and property.
Jason Hollands , managing director at Tilney Bestinvest sees “a cocktail of concerns in the outlook for 2016”. These include:
- slowing global growth, with China at its epicentre
- disinflationary pressures, a slowing in the rate of price inflation
- high levels of government and consumer debt constraining consumption growth
“In the near term we think investors need to take tread with caution and be very selective on where they invest. Just ‘being in the market’ won’t be good enough,” he says.
Mr Hollands investors who want to be choosy about their investments should consider European and Japanese stock market investments. He says: “Both regions are already printing money but are nowhere near their target rates of inflation and therefore there is a real prospect of them stepping harder on the accelerator, which would support asset prices though the benefit to the real economy is questionable.”
Mr Hollands also thinks that in the current rocky investment environment, investors should consider ‘targeted absolute return funds’ that aim to make money regardless of market conditions.
Tilney Bestinvest’s favourite absolute return funds
- FP Argonaut Absolute Return
- Threadneedle UK Absolute Alpha
- Invesco Perpetual Global Targeted Returns
- Standard Life Global Absolute Return Strategies
- JPM Multi-Asset Macro
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.