Just the January effect?
In 1942, the phenomenon known today as the January effect was first discovered — the observation was that stock prices would generally rise more in January than in other months of the year.
2023 was no exception. This January, almost all equity and fixed income markets displayed positive returns — an encouraging trend following a dismal December. Bucking the trend were India, Turkey, and, to a slight extent, Brazil. The best performer was, unsurprisingly, China.
Academic studies have also noted that the January effect tended to be most pronounced in small-cap stocks. This trend appeared to be intact again in 2023. Small-cap stocks in the US outperformed large and mid-cap stocks by almost 4%. However, this was reversed for markets outside of the US, as small caps in developed markets underperformed the large and mid caps by about 55 basis points (or 0.55%).
This effect and the possible explanations and reasons driving the trend have been discussed in many published papers. Some academics believe that tax-loss harvesting in December may have triggered the January effect. Tax-loss harvesting is an investment strategy in which stocks that have had losses are sold in order to offset capital gains from other investments. This “artificial” reduction in stock prices in December generates a price bump in January as other investors buy these oversold stocks. However, this strategy is not necessarily used in every country.
Others argue that the rise in stock prices may be more behavioural and psychological in nature. Investors, flushed with cash from year-end bonus payouts, channel their new-found wealth into the stock market. Another theory is that the perception of a new calendar year may generate feelings of euphoria and optimism and induce investors to invest more.
Macro factors at play
Perhaps there is more to what is going on than the January effect. There was certainly a lot at play.
The prize for the debate of the month may yet again go to inflation expectations and interest rate hikes. Have they peaked or is there more to come? Some macro figures — such as a lower-than-expected US consumer price index, higher-than-expected GDP growth, and a still strong job market — give reason for hope that the worst might be over, though recession fears continue to be top of mind for everyone. Luxury spending remains high worldwide. The Europeans breathed a sigh of relief, as the winter has not imposed the outsized holes on their energy budgets that the Russia-Ukraine war may have caused in case of colder weather.
Share price increases in Asia’s emerging markets were, unsurprisingly, closely tied to China’s reopening, coming full circle. For instance, there were hopes for more trade and more tourists to visit the countries previously most affected by China’s now-scuttered restrictive measures. In such an environment, China-related worries such as its strained US relations, aggressive foreign policy, and sanctions did not dampen the good mood too much.
Two big emerging markets were negatively impacted by idiosyncratic events in January 2023: India faces a brewing controversy about share price manipulation and fraud, while rioters in Brazil staged their own post-election “Stop the Steal” parliament-storming, bringing to mind the US Capitol attack on 6 Jan 2021.
Meanwhile, fixed-income markets were also positive for the month. Global bond yields eased as markets anticipated a slower pace of rate hikes. Credit outperformed government bonds in both the US and Europe. Although the headline inflation rates in both the US and Europe were lower, core inflation in the Eurozone area remained elevated.
The greenback slid against other developed-market currencies. Emerging-market currencies strengthened amid indications that US interest rate hikes may be tapering off.
The January barometer
No matter the reasons, what is clear is that January 2023 was a really good month for both stocks and bonds. There is also another theory (or myth) that claims that the stock market performance in January is indicative of the performance for the rest of the year. We certainly hope that this holds true for 2023.
Key performance highlights for Endowus portfolios in January
- The Flagship Portfolios displayed strong relative performance in January, outperforming both the global equity and fixed income markets. This was largely due to the outperformance of the underlying fixed-income funds and the tilt to small-cap stocks.
- The environmental, social, and governance (ESG) portfolios, similar to the Flagship Portfolios, also outperformed in both the equity and fixed income segments.
- All three Income Portfolios outperformed their respective benchmarks by a significant margin, boosted by allocations to emerging markets (EM), listed real assets, and Asian equities.
- All three Cash Smart solutions generated positive returns amid more favourable macroeconomic conditions.
Endowus Flagship Portfolio
The Flagship 100% Equity Portfolio outperformed the global equity market by a slight margin
- In a reversal from December 2022, the global equity markets, represented by the MSCI All Country World Index (ACWI), posted positive returns in January 2023.
- Even though the tilt to value detracted from relative performance versus the broader market, the Flagship 100% Equity Portfolio benefited from a tilt to another factor — small caps. Whether from the January effect or due to more risk-seeking behaviour by investors, January saw US small caps outperform large caps, which was a boon for the Flagship 100% Equity Portfolio.
- The Dimensional Emerging Markets Large Cap Core Equity Fund was also a major contributor; it outpaced the MSCI Emerging Markets Index, as the fund’s focus on large caps helped mitigate the negative impact from the value bias.
The Flagship 100% Fixed Income Portfolio significantly outperformed the global fixed income market
- Similar to the equity markets, the global fixed-income markets, represented by the Bloomberg Global Aggregate Index, generated positive returns in January, with corporate bonds generally outperforming sovereign or government debt.
- Most of the underlying bond funds in the Flagship 100% Fixed Income Portfolio outperformed the Bloomberg Global Aggregate Index.The Amundi Index Global Agg 500m Fund performed in line with the index, as expected. Even though emerging-market (EM) debt underperformed developed-market (DM) debt, the PIMCO GIS Emerging Markets Bond Fund was a major contributor to the Flagship 100% Fixed Income Portfolio’s overall performance; it trumped the index by about 140 basis points (bps).
- The Dimensional Global Core Fixed Income Fund, with its greater allocation to corporate bonds, also did better than the Bloomberg Global Aggregate Index, contributing to the portfolio’s significant outperformance.
Endowus ESG Portfolio
The ESG 100% Equity Portfolio delivered slight outperformance against global equity market in January
- All three underlying funds in the portfolio delivered positive returns for the month, with the Schroder ISF Global Climate Change Fund and the Mirova Global Sustainable Equity Fund delivering meaningful outperformance against the global equities market, represented by the MSCI All Country World Index.
- The portfolio’s stock selection was the main contributor to the outperformance. Stock selection was especially positive in the IT (information technology) sector and the industrial sector.
- However, the positive stock selection effect was partially offset by the portfolio’s sector positioning. It is underweight on communication services — this sector rebounded strongly as sentiment improved in January. Also, the portfolio’s overweight position in healthcare and utilities as a result of its ESG focus also hurt, as both sectors underperformed the broad equities market.
The ESG 100% Fixed Income Portfolio outpaced the broader fixed income market
- All three underlying funds in the portfolio delivered outperformance against the global fixed income market, which is represented by the Bloomberg Global Aggregate Index. The UOBAM United Sustainable Credit Income Fund was the top performer, returning 3.2% over the month.
- The portfolio’s overweight position in corporate bonds contributed to relative performance, as credit markets did well in January and outperformed government bonds.
Endowus Income Portfolios
The Stable Income Portfolio outperformed the global fixed income market meaningfully during the month
- The portfolio’s allocation to credit markets as well as Asian and emerging-market bonds contributed to its outperformance, as these markets performed strongly in January.
- Fund selection in the Asian fixed-income market through the Fidelity Asian Bond Fund was especially strong. The fund staged a strong rebound, returning 4.1%, as it was positioned to benefit from the improved market sentiment in China.
The Higher Income Portfolio outperformed the 20-80 Equity-Fixed Income Composite Index meaningfully in January
- On the fixed income side, the portfolio’s allocation to credit markets, in particular to high-yield bonds, contributed to outperformance.
- In terms of equities allocation, the portfolio’s allocations to emerging-market equities and listed real assets were the biggest contributors to outperformance.
The Future Income Portfolio outperformed the 40-60 Equity-Fixed Income Composite Index meaningfully in January
- Similar to the Stable and Higher Income solutions, the Future Income portfolio’s allocation to credit markets as well as Asian and emerging-market bonds contributed to relative performance on the fixed income side.
- On the equity side, the portfolio’s overweight allocation to emerging-market equities, Asian equities, and European equities contributed positively to outperformance.
All three Income Portfolios are achieving their payout targets
- All three portfolios achieved their payout targets in January.
- We recently increased the payout target ranges for all three Income Portfolios. Their latest payout target ranges, per annum (p.a.), are: 5% to 6% for the Stable Income portfolio, 5.5% to 6.5% for the Higher Income portfolio, and 3.5% to 4.5% for the Future Income portfolio.
- The chart below shows that the annualised payout yields for the portfolios have been rising, and the latest figures fall within the new guidance ranges^.
- The increase in yields is a function of relatively stable monthly payouts and lower net asset values. This suggests higher forward-looking income if investors enter the market at this price point.
For more about the Income Portfolios' new payout targets and the outlook ahead for income investing, please refer to this article.
Endowus Cash Smart Portfolios
All three Cash Smart portfolios generated positive returns in January
- The macroeconomic developments during the month provided a tailwind to the Cash Smart solutions.
- The Secure, Enhanced, and Ultra portfolios started the year in positive territory.
Cash Smart Secure made stable gains during the month
- The Secure portfolio returned 0.24% in January 2023, in line with December 2022 returns.
- Although yields declined across the global bond markets (i.e. bond prices rose, as shown by the robust returns in the Enhanced and Ultra portfolios), the underlying funds of the Secure portfolio — the Fullerton SGD Cash Fund and the LionGlobal SGD Enhanced Liquidity Fund — were able to maintain their yields for the month.
Cash Smart Enhanced got a boost from exposure to high-quality Asian fixed income
- The Enhanced portfolio continued to rebound this January, posting its highest monthly return of 0.46% since its launch in July 2020.
- The UOBAM United SGD Fund was a major contributor to the portfolio’s overall performance for the month.
Cash Smart Ultra also continued with its rebound in January
- With three consecutive months of positive returns from all its underlying funds, the Ultra portfolio in January 2023 posted its highest monthly return of 1.21% since its launch in April 2021.
- China’s long-awaited reopening and the Chinese government’s supportive policies to restore business confidence were a major boost for the portfolio’s underlying funds, such as the Nikko AM Shenton Income Fund and the LionGlobal Short Duration Bond Fund.
Cash Smart projected yields have fallen slightly amid improving market sentiment
- As the markets price in and ingest the prospects of slowing interest rate hikes, newer issues of bonds are offering slightly lower yield than older issues. As a result, the Cash Smart portfolios’ underlying funds have reinvested maturing proceeds into such lower-yielding securities. Nevertheless, yield levels remain elevated and continue to provide an attractive entry point for long-term investors.
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