Sell in May and go away

‘Sell in May and go away, don’t come back until St Leger’s Day.’

This well-known city investment saying originated on the London Stock Exchange in the days when rich nobility, merchants and bankers would take time off from London to spend the summer months at their country estates. Not returning until the last major horse race of the year, the St Leger’s Stakes in mid-September. This meant that trading activity over the summer tended to be more subdued with a knock-on impact on performance.

How times have changed. There is now no such lull or downtime. Today we live in a 24-7 investment world, where as one market closes, another opens across the three main time zones – Asia, Europe and the US. The internet now enables all investors – big and small – to access live market data 24/7. The advent of passive funds, day traders, hedge funds, AI driven investment strategies, crypto-currencies and even tweets by US presidents have all added to increasing market volatility.

The financial press still uses the popular investment saying today, but is it still relevant for UK equities? Looking at the five-month period from May to September for the UK All-share index for the last twenty years shows a negative return in only six years. No return is guaranteed, and past performance is not a guide to the future. What we can say is that all markets are more closely inter-linked by global developments such as the global pandemic or the war in Ukraine. However, some events can be more region-specific, such as central bank actions, Brexit or the European energy crisis as sanctions were imposed on Russia.

The timing of investment is still key for long-term investors. If you can take advantage of a sell-off then this may provide a very attractive entry point. It must be remembered that markets are a barometer of investor, business and economic confidence and are typically looking forward up to 9-12 months. For example, the UK market turned positive in October 2023 as investors began to consider interest rate cuts in summer 2024. Indeed, the UK has continued to defy the sell-in-May adage, having recently touched a series of record highs. Unless US inflation disappoints, the main development likely to dampen market optimism could be of a geo-political nature, given events in the Middle East, China/Taiwan, and US/China trade relations. However, takeover activity remains a strongly supportive factor of UK equities, with bids coming thick and fast from private equity/oversea buyers – a clear sign that some UK valuations are still too low. The total value of the announced UK takeovers seen so far this year is almost three times the level seen in the whole of 2023!

Perhaps the new saying could be:‘Buy in June, for another bid soon’?

What have we been watching?

Apart from Europe, market hopes of interest rate cuts faded last week as bond yields climbed back towards a 3-month high. The US Federal Reserve (Fed) continued to attempt to dampen market hopes for an early interest rate suggesting it is waiting to see more signs of inflation slowing down. This message was reiterated in the minutes from its latest meeting which showed that committee members are more concerned by the lack of progress in tackling inflation. Despite Fed caution, the US NASDAQ index hit a record high aided by strong results from AI chipmaker Nvidia. The European Central Bank still looks on course to cut interest rates in June. In the UK, the announcement of a July general election overshadowed the latest inflation data. While inflation dropped, it was not as great as had been hoped while core inflation remains sticky.

China complained after a number of countries acknowledged Taiwan’s new president William Lai as he was sworn in. It also responded by undertaking two days of military exercises around Taiwan as ‘strong punishment’ for the self-ruled island’s ‘separatist acts.’ Taiwan’s defence ministry said the country would seek no conflicts but ‘will not shy away from one.’ Meanwhile, Bloomberg also broke a fascinating story about what chip makers ASML and TSMC would do were China to invade Taiwan. Apparently, a method has been developed, which is effectively a kill switch that would disable the extreme ultra-violet lithography machines. ASML is the only manufacturer of these machines and TSMC the major user. TSMC is a major supplier to Nvidia.

In the UK, the inflation data prompted PM Rishi Sunak to call a general election for the 4^th of July. Markets continue to assume a Labour win, and the only question appears to be the scale of the victory. Regardless of the outcome, whoever wins will face the problem of finding funds for departments beyond the NHS and defence spending. Headline CPI inflation dropped from 3.2% to 2.3% in April reflecting lower energy prices. However, core inflation only dipped from 4.3% to 3.9% while services inflation only edged down from 6% to 5.9%. The main factor here was strong wage growth, with the national living wage having increased last month. While only one month’s data, it would tend to suggest that core inflation is not tracking as the Bank of England expected and may delay the expected first intertest rate cut to August. Meanwhile, ‘flash’ PMI business activity indicators for May remained in expansion mode but came in slightly lower than expected with the composite reading of 52.8 and within this, manufacturing at 51.3 and services at 52.9. The weather impacted retail sales in April, but even so the figures were much weaker than expected.

In Europe, the ‘flash’ PMI business activity indicator remained in expansion mode in May with a composite reading of 52.3. The improvement was driven by Germany, which continued to see a pick- up in activity in both the manufacturing and service sectors.

In the US, the S&P Global ‘flash’ business activity indicator moved firmly into expansion mode in May with a reading of 54, a 25-month high.

Brent oil was relatively stable at around $83 despite the uncertainty created by the death of Iran’s President Ebrahim Raisi in a helicopter crash.

Finally, never upset your customers. Another ‘law of unintended consequences from Tesla cutting the price of its EVs in Europe to address Chinese EV competition. Apparently, fleet owners and leasing firms which represent about half the European market are reported to not be happy as the price cuts mean a drop in residual value of the vehicles at the end of the lease. Tesla is reported to be offering fleet customers discounts to address the issue. It is a reminder that green technologies such as EVs are still subject to the same economic challenges -interest rates/financing – as Internal combustion engine vehicles!

Read Last Week’s Alpha Bites – Forward looking statements

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This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

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Sell in May and go away

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