Timing is crucial in equity investment. This is especially so as the stock market is very cyclical. A good entry point will allow one to buy at a few percentage points lower and sell at a few percentage points higher than average investors. With an average return from the stock market at 8%-12%, depending on the period of investment, those few percentage points mean a lot to investors who are trying to earn higher than fixed deposit rates.
When is the best time to invest? January? or February? When is the time to avoid the market? May? or October? And when is the optimal period to be in the market so as to maximise return?
We have made some analyses based on the past 30-year data. Besides Malaysia, we also scrutinised the markets of neighbouring countries, Singapore and Hong Kong, as well as the US. We made use of benchmark indices as the proxy for the stock markets.
Voluminous data churning
Using the monthly closing data for each of the markets, we commenced by computing the return for each month. Thereafter we computed the returns for different periods starting from any two-month holding period, then three months and so forth. We also analysed the average returns per month assuming additional month invested in the stock market means additional risk.
We also compiled the correspondent standard deviations. The pattern of the trend was also looked into by breaking down the 30 years into three periods of 10 years each.
Our computer is full of various tabulations, charts and comparisons. We will only show information which could serve as useful guides for investors. Although past patterns may not accurately predict the future, they can still provide helpful indicators as we noticed some of the patterns are consistent with high confidence levels statistically.
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The average monthly performance of the four countries under this study are shown in the charts as represented by their respective local indices. At first sight, it is clear from the peaks and troughs of the monthly returns that the markets were cyclical. Strong gains and losses in certain months happened repetitively over the years, indicating there were visible trends which may be useful for future investment guides.
December was the best month
On a month-to-month basis, December was the best month to invest as it provided the best average return of 3.9% based on the KLCI since 1980. Over the past 30 years, 80% of the time December ended up as a positive month, which means that there is only a one-fifth chance that you may lose money in December. As such, investors who intend to invest in the market should plan ahead.
The strong performance in December was also depicted in the Singapore, Hong Kong and US markets. In all the four markets we studied, December was the best month. Other than Bursa Malaysia, the other markets showed more than 70% chance of making money in the month of December. In terms of absolute return, December happened to be the best-performing month for Singapore and Hong Kong. In the case of the US market, the pattern was slightly different as the gain in December was moderate. The gains in April and November beat that of December.
The coincidence of a strong December performance could be due to a global phenomenon whereby the strong performance of a major market, most likely the US, led to improved sentiment in other markets. One possible explanation could be due to the year-end window-dressing activities to boost the market for fund valuation or for performance purposes.
January Effect
January was an average month in the US, both in terms of probability and absolute return. January Effect was described as the possible tax effect whereby investors sold their shares before year-end and reinvest again in January to minimise tax liability. In the US and in many other developed countries, realised capital gains from share disposals are taxable.
Investors in Malaysia, Singapore and Hong Kong are fortunate as capital gains are generally not taxable and hence there is no need to do such tax planning. Nevertheless, January’s performance was above average with the Malaysian market, showing slightly better gains than that of the other two markets. Another possible explanation for the January Effect in the Far East is that bonus and increment in January provide additional liquidity to support the market during the month.
Recently, the January Effect has been getting less obvious in the US. For the last 10 years, January has even started to show losses in the US. The Malaysian market recorded as high as 69% chance of making money in January with an average gain of 1.8% in the month. For the past 10 years, the only year where January did not end in positive territory was in 2008.
Chinese New Year rally
Chinese New Year normally falls in February and this auspicious month has provided “good luck” to punters in the past, especially in Malaysia where the percentage of positive month was 67% and the average gain in February was a strong 3.3%. The Singapore and Hong Kong markets also did quite well in February. The strong performance in that month was partly due to exceptional gains in the Februarys of 1987, 1991 and 1998.
On the other hand, the US market did not seem to have any affection for the month of February. The Singapore market seems to follow the weaker US market in February than the stronger performance of the Malaysian market.
Other than the liquidity reasoning that we postulated for January, we do not have other specific explanation for the strong performance of February.
Sell in May and go away
The investment myth “sell in May and go away” seems to apply more to the US market. May was generally a good month in the US but the subsequent months from June to September did not perform as well. However, this myth was ignored by investors in Singapore and Hong Kong as the two markets continued to show gains two months after May, especially in July where the gains were even more pronounced.
August was gloomy
The worst month in the past was August. Based on the KLCI, only 33% of the August month ended in positive territory, the average loss in the month was a high 3.05%. The huge losses were due to several crises that happened to fall in August. But when the sky was clear, the gains were not substantial. If we analysed the performance further, the poor August performance happened in each of the past decade, indicating a high degree of certainty in this case.
Similar observations were seen in the Singapore and Hong Kong markets where the probability of a positive month in August was only 40% and 47%, respectively. Although the two neighbouring bourses did better than us in August in the past, the chances of making money in August were still below average. In terms of absolute performance, Singapore suffered a loss of 1.85% in August and Hong Kong fell 1.1% on average during the month.
It is yet to be seen whether history will repeat itself. August is definitely a gloomy month to watch out for.
Optimum investment period
What is the optimum period of investment? We recompiled our data to compute the average monthly return for different periods. As there is incremental risk involved for every additional month invested in the stock market, the optimum period will provide the risk and return trade off. Based on our analysis of the KLCI, the optimum period was three months where the average return was 0.887% per month.
Although holding stocks for four months may yield a slightly higher return, the incremental risk is higher. The same phenomenon happened in Hong Kong as the pattern of return versus holding period between the KLCI and Hang Seng Index seemed similar. As for the US market, the S&P 500 seemed to suggest a longer holding period of four months. The only market that did not show obvious optimum period of investment is Singapore.
From our observation, the best time to be in the Malaysian market was from December to February. That also applied to Hong Kong market. But in the case of the US market, the lack of a February Lunar New Year rally, shifted the period slightly. The S&P seemed to predict the optimum period of investment as November to January.
The Singapore market appeared to indicate two optimum periods — November to February, and April to July.
Conclusion
While the past may not predict the future, the high degree of statistical significant patterns cannot be ignored. As investment is not a perfect science, the probability of a gain or loss in a particular month in the past can still be used as an additional guide, especially during periods where one becomes uncertain of the market direction.
Investors thinking of selling should hold till the early part of the year like January or February. Those who are uncertain when is the best time to invest may want to wait till August-October to accumulate stocks. For whatever reasons, many of the major financial mishaps seemed to happen during this period.
For those who intend to invest for a short period, December to February will probably provide the optimum period to maximise return without risking the investment for an excessive period.
Written by Ang Kok Heng
Ang has 20 years’ experience in research and investment. He is currently the chief investment officer of Phillip Capital Management
Sdn Bhd.
This article appeared in The Edge Financial Daily, August 30 2010.
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