Climate change ahead for seasonal investment flows

LONDON Sat May 5, 2012 5:16pm IST

Traders work on the floor of the New York Stock Exchange August 8, 2011. REUTERS/Brendan McDermid/Files

Traders work on the floor of the New York Stock Exchange August 8, 2011.

Credit: Reuters/Brendan McDermid/Files

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LONDON (Reuters) - Just this once, might it be wiser to 'buy in May'? Followers of the slightly tired but remarkably prescient old stock market adage "Sell in May and stay away" are justifiably confident that history is on their side.

Then again, rules are there to be broken and there's just a hint of a change in seasonal investment climate this year.

Going against what have become identified as negative seasonal money flows is never terribly attractive for investors and there are no shortage of potential pitfalls looming over the coming northern summer.

Yet asset managers around the world have turned more neutral on global stocks up to six weeks earlier than normal this year and there's a chance the annual pattern has shifted.

"Maybe 'Stand Pat in May' is more apt this year" said Andrew Milligan, head of global strategy at Edinburgh-based Standard Life Investments, which has around 155 billion pounds of assets under management.

The "sell in May" phrase is probably the most famous in investment almanacs. In its more complete form, it says "Sell in May and stay away until St Leger Day" - the latter referring to the British St Leger horse race in Doncaster that traditionally marks the end of the flat racing season in mid September.

And 'lo and behold, a 40-year history of global stock price moves shows a dramatic underperformance on average during the middle third of the year between May and September.

Since 1971, the average January to April gain in the MSCI all-country world index has been 4.5 percent and 2.9 percent in the final four months of the year. But from May to September the gain is a measly 0.1 percent.

What's more the third quarter of the year is the only three-month period in negative territory on average and September is the worst performing month, clocking up an average loss over 40 years of almost one percent.

FRONTLOADING SEASONALS?

A variety of factors are used to explain the pattern. The most basic is that if you've made money early in the year - as new money has lifted the bourses - and then booked profits on them as the tax year ends around April, then it typically wasn't worth recommitting that cash during a liquidity-scarce and potentially more volatile summer holiday period.

So, why lean into that sort of time-honoured headwind now? For one thing, there's no shortage of risks to keep you wary this summer - a host of European elections and sovereign debt cliffhangers, mid-year euro bank deleveraging deadlines and the passing of the U.S. Federal Reserve's latest bond buying operation in June to name just a few.

Well, the global stock market selloff happened a month early this year - in stark contrast to the almost slavish seasonal patterns of 2010 and 2011.

After a first quarter surge of almost 13 percent, related to a flood of cheap loans from the European Central Bank to its banks, world stocks peaked on March 27 and shed about 5 percent before stabilising.

The question for many is whether there has been a sufficient selloff already and whether that already takes account of a series of significant political and economic risks ahead.

Milligan at Standard Life said the data he monitors shows portfolios in general have certainly turned more neutral well ahead of May and are now better positioned for both the downside and also equally-significant upside risks too - chief among them policy initiatives on growth in Europe or monetary easing and fiscal twists on both sides of the Atlantic.

Reuters April asset allocation polls show global equity holdings pared back from March and Boston-based fund tracker EPFR shows cumulative weekly flows to developed market equity funds year-to-date are negative already.

There's also an absence of extremes in other market gauges. Implied volatility on Wall Street has already climbed from lows but is not flashing red in either direction. Intra-market an intra-sectoral equity correlations, typically high in times of stress, are also relatively benign and middle of the road.

EDHEC consultants point out relative underpeformance so far this year of typically aggressive hedge funds, a potential sign that few are confident in long or deep trends developing and mindful of both upside and downside risks.

Barclays strategist Michael Gavin said April took a lot of heat out of risk markets without panic sell-offs. "Investors are fully aware of the dominant risks and positioned accordingly; they are paid to hold risk and are likely to be compensated over time for bearing it."

This is the message from private wealth managers also. For every risk, they insist there is either a potential positive monetary and fiscal policy response or a compelling long-term valuation, where price/earnings multiples and equity-risk premia over rock-bottom government bond yields remain attractive - particularly in Europe.

What's more, retail investors who feel they already frontloaded seasonal trends and braced for risks both ways will be wary of excessive transactions costs with increasing trading.

For fund managers, however, more active trading may be the answer to smooth the bumps for clients and therefore the "stay away" aspect of the old adage may even be dangerous.

"I would not be comfortable getting out of this market and going away - there are risks but also some very big opportunities," said Arnaud de Servigny, global head of discretionary portfolio management and strategy at Deutsche Private Wealth Management.

"This is a time when we need to be monitoring developments and being active and not to be away from markets for too long."

James Butterfill at private wealth manager Coutts in London, also said 'sell in May' is just "too simplistic" even if there are obvious risks ahead.

So for those who do have a longer-term conviction in holding equity and who can turn a blind eye to any summer volatility, the seasonal flows adage says you may just want to grin and bear positions until St Ledger Day.

(Reporting by Mike Dolan. Editing by Jeremy Gaunt.)

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