Is there a Ramadan effect in Nigerian markets?

By Rafiq Raji, PhD

Stock market returns have been found to be higher in Muslim countries during the month of Ramadan – the ninth month of the Islamic calendar. A Ramadan effect. Intuitively, this should probably be the case. Research studies have confirmed the phenomenon nonetheless. In a February 2014 research paper published by the International Review of Financial Analysis, a top academic finance journal, Prof. Osamah Al-Khazali of the American University of Sharjah in the United Arab Emirates, shows evidence of the Ramadan effect in fifteen Muslim countries: mostly from the Middle-East but includes two Asian countries with a dominant Muslim population: Indonesia and Malaysia. There were prior studies. In a 2012 study for instance, Dr. Jedrzej Bialkowski (an associate professor at the University of Canterbury in New Zealand), Prof. Ahmad Etebari (a finance professor at the University of New Hampshire in the United States) and Dr. Tomasz Wisniewski (a finance lecturer at the University of Leicester in the United Kingdom) showed evidence of the Ramadan effect in about 11 Muslim countries. Researchers interested in the subject are diverse.

Fundamentally, the academic interest is – as the group of researchers in my second example put it – “whether a religious practice can, through its influence on investors’ psychology, affect the behaviour of the market.” Similar investor buoyancy has been associated with the Chinese New Year for instance. That in regard of heightened optimism during the Gregorian New Year – when most make resolutions to change a bad habit, set financial goals, etc. – is also well-known. Little wonder, investors tend to earn higher stock returns in most markets during the month of January. A January effect. There is also a Monday effect: most people tend to be optimistic at the beginning of the business week – which but for some Muslim countries, is usually Mondays. So, there is a myriad of these so-called effects; stock market anomalies, we call them.

Two themes are palpable: Epochs or important periods in peoples’ lives – and the feel-good factor associated with them: optimism. So such epochs could be the month of Ramadan for Muslims, Christmas or New Year for Christians, and the Chinese New Year for the Chinese. It makes intuitive sense, doesn’t it? This was the main proposition of my doctoral dissertation, albeit I focused on the January effect in the Nigerian and South African equity markets. I suggest positive investor sentiment (optimism) around epochs may be why higher stock returns are earned at those celebrated periods of our lives. But the reverse case needs to be equally true for this to be considered seriously. It would probably take a lifetime of research work to prove this to be a consistent explanation. As a budding researcher, this is gratifying. Prof. Kalu Ojah – a Nigerian and professor of finance at the University of the Witwatersrand in South Africa – and I authored a research paper based on the dissertation (“Does investor sentiment explain the seasonality of overreaction? Examples of the Nigerian and South African equity markets”), published by The African Finance Journal in 2015.

I do not know that there has been a study of the Ramadan effect on the Nigerian Stock Exchange (NSE) – a tip for aspiring doctoral students in finance (I get asked about this on occasion). The closest proxy is probably the country’s food markets. Food prices are generally known to rise during the Muslim holy month in Nigeria, stoking inflation. Considering an investment return must at least compensate for inflation – the minimum expectation of lenders to the government for instance: a risk-free interest rate, you could intuitively assume that there is probably a Ramadan effect in the Nigerian equity market; where investors expect higher compensation for risk.

Ramadan-related food price inflation may be marginal this year, however. Put another way, we could not say that high inflation expectations for the months of May, June and July (the month-long Muslim fast started on 6 June) this year are related to Ramadan. Annual inflation forecasts for May are as high as about 15 percent (mine is 13.6 percent), much faster than the 13.7 percent headline figure in April. There are more significant factors pressuring prices: weak currency, power shortages, insecurity in key farming regions, pest-infected tomatoes, etc. When there have not been competing factors, food inflation tends to accelerate during Ramadan. It is a little bit counterintuitive that this should be the case. After all, fasting Muslims forgo lunch. Increased charity during the period may be why – more people probably get fed. Regardless, savvy food traders tend to add a Ramadan premium. Whether there is an actual increase in demand for food or not is no matter.

Still, supposedly rational investors in formal markets are not likely to be similarly motivated. In the Nigerian case especially – where Muslims are about half of the population, the behaviour of food traders in its informal markets may not be sufficient to motivate the intuition of a likely Ramadan effect on the Nigerian Stock Exchange. That is, as observed in the stock markets of countries where the dominant group is Muslim. There are opportunities for the savvy participant in the Nigerian financial markets nonetheless. A sukuk bond – debt instrument based on Islamic principles – would probably get more subscribers during Ramadan. It is also probably the best time to launch a ‘halal’ (or ‘ethical’) mutual fund. Similarly, Nigerian companies perceived to be ethical may choose to raise capital during the Muslim holy month. As with the Gregorian New Year, creative portfolio managers could probably design investment strategies that leverage on the feel-good factor associated with Ramadan as well. For those interested – academics and investors alike, these are certainly worth exploring.

Also published in my BusinessDay newspaper back-page column. See link viz.

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