Will January Effect Visit Seoul Bourse?
By Kim Tae-gyu
Staff Reporter
In January 1998, the benchmark KOSPI soared 50.77 percent after steep declines in the previous months caused by the Asian currency crisis.
In other years, share prices also tended to rise more in January than other months, in a phenomenon dubbed the ``January effect.''
The question is whether the positive movement will take place again this month, despite the credit crunch and the subsequent financial crisis. Experts are split into two opposing camps over whether the phenomenon will return.
``Nobody knows for sure why share prices jump every January. But it has been observed many times across the world,'' Woori Securities analyst Lawrence Kim said.
``Although the January effect seems to be real, it is unlikely to visit the Seoul bourse in 2009 as the economy continues to head south. In this climate, share prices cannot go up,'' he said.
In contrast, Goodmorning Shinhan Securities researcher Lee Sun-yup is somewhat upbeat.
``In spite of a series of bad news stories in the real economy, stock prices have stabilized of late. This shows the current share prices have already factored in all the bad news,'' Lee said.
``Hence, when a momentum is developed, the stock market has a shot at rallying over the short-term. I expect a bright future, reserved for January 2009,'' he said.
January Effect in Korea
Since 1983, when the KOSPI was introduced, the index increased 3.28 percent in January on average, which is the second-highest monthly gain, chasing only the 3.3 percent of November.
In particular, the KOSPI rocketed 50.77 percent in January 1998, creating a record. The next highest monthly jump over the past quarter century was 30.01 percent in October of the same year.
According to Wikipedia, the January effect refers to the tendency of the stock market to rise between Dec. 31 and the end of the first week in January.
The online encyclopedia attributes the effect to corporate investors, who choose to sell some of their stocks before the end of the year to claim a capital loss for tax purposes.
If they reinvest their money in the market after the tax calendar rolls over to a new year, the share price is supposed to go upward in early January.
But in Korea, not so many companies adopt such a tax-reduction strategy and the January effect is regarded as the monthly leap for the whole of January.
The reason for the abnormal price change is also ascribed to people's optimistic expectations for the future with the advent of a new year.