'Sell in May' has outperformed in Europe

Equities investors are sitting on solid returns since the start of the year, leading them to ask one of the oldest questions in finance: should they take their profits before the summer holidays kick into full gear?

Rising valuations for equities, bubbling inflation worries and concerns that central banks will have to tighten the liquidity spigot that has helped to drive up stock markets have all led investors to ponder whether it is best to sit out the coming months.

“I’m hearing the ‘sell in May’ question all the time,” said Johanna Kyrklund, chief investment officer at asset manager Schroders.

US stocks are up about 11 per cent since the start of 2021, while those across European bourses have risen about 12 per cent, according to MSCI indices that track both markets in dollar terms. Equities in the Asia-Pacific region have climbed a more modest 4 per cent.

These gains have helped to push valuations above their long-term averages on most measures in the US, UK, Europe, Japan and emerging markets. Still, Schroders is advising its clients to stay invested.

“Equity valuations suggest it’s time to slow down in markets, but you can’t take your foot too far off the gas due to the dearth of more defensive options,” Kyrklund said.

Neither HSBC nor State Street is recommending a summer off strategy to clients either.

S&P 500 total return vs 'sell in May'

However, data suggest that in some markets, taking some chips off the table before the summer revs up has been a successful strategy. Swiss bank UBS found that while a “sell in May” strategy, compared with staying fully invested, delivered outperformance in Europe over the past 15 years it did not in the US.

June tends to be a weak month for European equities, which have produced negative returns for the six months between May and October in four years during the past decade, according to UBS. But US returns have turned negative between May and June only in 2001 and 2015 over the same period.

“Trying to time the US market for seasonal reasons would have missed the outperformance of growth stocks in the bull market since the 2008-09 financial crisis,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

Kyrklund also found seasonal investing unappealing and said it was “too early to be overly defensive” in the present market and economic upswing. “There is no recession on the horizon so you need to stay invested and you can’t sit in cash,” she said.

Schroders recommends against traditional hedges against a fall in equities such as government bonds, gold and cash that deliver little or no income in the current environment. Instead, Kyrklund is advising clients to increase their exposure to value stocks, financials and commodities.

HSBC is recommending that investors increase their exposure to UK and continental European equities and south-east Asian stock markets. “Governments bonds are no longer the natural hedge,” said Joanna Munro, the global chief investment officer at HSBC asset management.

Lori Heinel, State Street’s global chief investment officer, expects European equities to outperform but thinks Chinese stocks also “deserve consideration” because valuations are below their long-term averages and Beijing is tightening monetary policy.

“We have also added exposures to commodities as a hedge against [economic] growth shocks,” she said.

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