Is 'sell in May' good advice for investors?

May 04, 2015 17:33
Hong Kong investors should not have unrealistic expectations about mainland policy. Photo: HKEJ

In the United States, there is an old saying that goes, “Sell in May and go away”. The Chinese have a similar expression: "Decline in May, bottom in June and rebound in July."

The Hong Kong market saw massive gains in April, but it seemed to have run out of steam in late April. That has stoked concerns that the market may undergo a correction in May.

Should investors sell in May?

Liquidity has improved substantially after the central government adopted monetary easing measures. Market sentiment has also picked up.

However, the growth rate of fixed-asset investment continues to hover at a low level. China's value-added industrial output also expanded at a slower pace amid the restructuring efforts.

The consumer price index has rebounded as a result of rising food prices, while wealth creation from the bull market is expected to boost consumption.

Growth in new bank loans is likely to accelerate and the M2 money supply is also poised to expand as the central bank has cut the reserve requirement ratio for banks and increased short-term and targeted lending.

There is room for further interest rate cut given the mounting economic slowdown pressure. As a result, the renminbi is likely to weaken further against the US dollar.

Meanwhile, the market is closely watching whether China will resort to its own version of quantitative easing.

This is highly unlikely, however. Instead, China would launch its own long-term refinancing operations (LTRO), inject capital into policy banks, and release credit assets securitization. All these measures will help raise funds for infrastructure projects.

Give all these considerations, it may not be wise to "sell in May".  The strategy has not worked well in the past either.

In fact, the market's performance in May has not been the worst in the US market over the last 50 years, compared with the average slide in September. The market usually goes quiet in May and September, and an upward rally usually moderates in May. That’s most likely the reason for the “sell in May” dictum.

By contrast, there is no particular pattern for the Hong Kong market's performance in May. Over the last four decades, the market moves up half of the time in May, and also moves down half of the time in the month. The average level in May ranks sixth among all the months of the year.

As such, “selling in May” does not work.

Meanwhile, the monthly average rally in the second and third quarter in the Hong Kong market has not lagged behind the other two quarters as obviously as they have in the US market.

Sell-off and profit-taking pressures are also much subdued.

Nevertheless, investors should not have unrealistic expectations about mainland policy. They need to look at economic fundamentals given that all these anticipated measures have been launched already.

Investors should be wary of foreign markets as well.

This article appeared in the Hong Kong Economic Journal on May 4.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker