Will the year of dragon boost stocks?

THE Chinese ‘year of the dragon’ officially began on 23 January and, according to tradition, the dragon brings in the four blessings of the East: wealth, virtue, harmony and longevity.

Of the 12 signs of the Chinese zodiac, the dragon is considered the most special (as it is a mystical being rather than an earthly animal).

In this context, we can expect grand things this year, with spectacular successes. The spirit of the dragon will ensure that business is good and that money can be earned. The year of the dragon is also a year to get married, have children or start a business. In short, it is a year to take the plunge!

Investment hangover

From a financial markets perspective, though, history cautions that the exuberance of the dragon can leave investors nursing investment hangovers.

The previous dragon year, in 2000, brought the culmination of the tech bubble at the time of Y2K and amid fears of a seizure in the global money markets (fears that ultimately proved unfounded).

Long-term prosperity

Having said that, the year of the dragon has been a very prosperous year for US equities over the long-term, with an average return of 8.3% for the 11 dragon years over a 140-year period.

Volatility has come in at an annualised 13.5%. Indeed, the dragon is the least volatile of the 12 animals.

The best performing, however, is the rabbit, with average index returns of 12% and volatility of 17%. This combination just pips the dragon into second place, but history at least suggests that 2012 could be a better year than suggested by the consensus in early January.

For all signs of the Chinese zodiac, there are likely to be significant upheavals in 2012. The dragon year is associated with soaring stock markets and natural disasters, while dramatic cultural and political developments will be more the norm than the exception. So, a wild year potentially awaits, if you have faith in Chinese astrology!

Better conditions

The most important piece of advice is for investors to enjoy the better market conditions while they last: the volatility that characterized 2011 was nowhere to be seen during January. Only once did the Dow Jones Industrial Average (DJIA) move more than 1%, posting a 1.5% increase on the first trading day of the year.

Instead, there was a calm, reasonably steady upward progression, with markets largely shrugging off ratings agency Standard & Poor’s downgrading the debt of nine countries in the Eurozone. The DJIA ended the month at almost 12,633 – within hailing distance of a new 52-week high and its best January performance in 15 years.

The year of the dragon is followed by the year of the snake, which has historically provided the lowest average investment returns.

Pic credit: kongsky/ FreeDigitalPhotos.net

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