The January Effect is an annual phenomenon marked by an increase in stock prices. How significant is the impact of the January Effect on our investments?

What is the January Effect?

Like the Santa Claus Rally in December, the January Effect is an annual phenomenon in the capital markets. The January Effect is usually marked by mid-cap and small-cap stocks that increase at the beginning of the year.

In 1942, a banker named Sidney B. Watchel researched stock performance in January.

The results of his research show that mid-cap and small-cap stocks continued to outperform big-cap stocks, with positive performance occurring before mid-January.

Watchel further investigated this phenomenon and found that the pattern had existed since 1925.

Notes:

• Blue Chip or Big Cap stocks are stocks with a market cap (company value) of more than IDR 10T. Examples of Blue Chip stocks in Indonesia: Bank BCA, Bank BRI, Bank Mandiri, Telkom, Astra International and others.
• Middle Cap stock is a stock with a market cap (company value) of IDR 1T – IDR 10T. Examples of Middle Cap stocks in Indonesia: Blue Bird, Surya Toto Indonesia, Wijaya Karya, Erajaya Swasembada and others.
• Small Cap stock is a stock with a market cap (company value) below IDR 1T. Examples of Small Cap stocks in Indonesia: Fortune Indonesia, Prima Alloy Steel Universal, and others.

Why Does the January Effect Occur?

Several things can cause the January Effect:

• Investment managers (MI) buying back shares sold at the end of the year.
• Retail investors buying shares at the beginning of the year as a result of the spirit of the new year as well as taking advantage of year-end bonuses.
• Positive sentiment, as a result of positive news.

Does the January Effect Always Happen in Indonesia?

The following is Seasonality data for JCI and IDX 30 in January for the last 10 years. Seasonality is the performance tendency of an index or stock in a certain period (eg month to month or year to year).

Notes:

• JCI or the Stock Price Composite Index is an index that describes the average performance of all stocks on the Indonesian Stock Exchange.
• IDX30 are 30 stocks with the largest capitalization that are heavily traded (high liquidity) and have good performance and fundamentals.

When looking at the seasonality data for 2020 and 2021, the JCI failed to experience the January Effect.

In January 2020 there was no COVID in Indonesia so the main cause was the Jiwasraya Insurance case which caused investors to be fearful.

In 2021, the JCI also failed to close higher at the end of January because it had peaked in weeks 2 and 3. The following is the JCI chart.

When looking in more detail, historical reports show that over the last 10 years, both the JCI and IDX30 have had a 70% chance of rising in January. Surely this 70% increase opportunity is very attractive for investors, right?

We as individual investors can take advantage of this opportunity by buying mid-cap and small-cap stocks or buying mutual funds.

IDX 30 index mutual funds or equity mutual funds that contain midcap stocks are good options. Examples of index mutual funds available on the Moduit platform are BNI-AM Index IDX30, Principal Index IDX 30 class O.

January Effect: Is it a Good Time to Buy Stocks?

Three stock selection strategies that most individual investors execute are:

Value Investing

Value investing means buying stocks whose prices are discounted from their intrinsic value (original value). Value Investing stocks are included in the IDX Value 30 index.

Growth Investing

Growth investing means buying stocks that are experiencing growth at a reasonable price. Growth Investing stocks are listed in the IDX Growth 30 index.

Dividend Investing

Dividend investing means buying stocks that pay dividends regularly and have good performance. Dividend Investing stocks are listed in the IDX High Dividend 20 index.

Investment Strategy Example

The following is an example of a stock investment strategy carried out by the author.

Note: this article is for educational purposes, not investment advice. Please contact a Wealth Advisor for investment advice.

• The author limits the number of shares to a maximum of 5 divided into 2 Big Caps and 3 Value Stocks.
• The author implements a long-term investment strategy (more than 5 years), suitable for value investing stocks with a minimum discount of 30% and a dividend of at least 6% per year.
• The writer's 2-3 year term investment strategy prefers big cap stocks whose prices are experiencing market correction.

How to Buy Stock

Investors can open an account with a securities firm or become a client of Moduit Beyond. Moduit Beyond is a Wealth Management service handled by experienced wealth advisors.

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