Sell in May?


 

The summer is traditionally not where the best returns lie for equity investors. I wouldn’t always advocate sell in May and go away - for example we managed to deliver strong returns for investors through the summer of 2009 by running equity overweights. However, there are a number of risks out there that make me think it’s the right strategy this year.   There is much US political risk. Its possible that there will be much more significant budget cuts than the market is expecting. While this will be a structural positive in the longer term, in the short term it will hurt growth in the US economy.   The US consumer is trapped in the doldrums, with confidence suppressed by high unemployment, a high oil price and a depressed housing market.   A sustained high oil price is in danger of creating demand destruction, slowing global economic growth. Although current levels are tolerable, much higher levels could become problematic.   There is an old adage - "don’t fight the fed". We are beginning to enter a period in which short term interest rates are going to begin to rise. We have already seen the first of the ECBs rate hikes. If I am wrong about the risks and growth remains strong then an interest rate cycle may begin in earnest. Either way, I don't see big upside for developed equity markets over the next few months.   In contrast, emerging prospects are better. Particularly, some of these economies like Russia are big commodity producers which would actually benefit from some of these risks. Further, the emerging consumer is alive and well and beginning to display a very strong appetite.   Within our flexible multi-asset funds, such as our flagship Skandia Diversified Fund, I've been using strength in risk markets to reduce exposure to equities and we are now back to a neutral position. I've held on to our emerging market allocations though, given that I think they are at a different point in the cycle.   Don’t get me wrong, I'm not a big bad bear. Equities are still the cheapest asset class out there and corporate profitability is great. More likely than not, equities will finish 2011 higher than they are now. However, I think that we will be better able to take advantage of the opportunities that these risks are likely to create over the coming months if we keep some powder dry.   NB: John Ventre is lead manager on the Skandia Diversified fund. He currently manages SIG funds of around £2.1bn  

 

By John Ventre, Portfolio Manager, Skandia Investment Group (SIG)

 

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