SELL IN MAY AND GO AWAY?

We can­not ever ex­clude the pos­si­bil­ity of a mar­ket cor­rec­tion, but it re­mains im­por­tant to keep trends over the long term in mind.

Finweek English Edition - - FRONT PAGE - By Schalk Louw editorial@fin­week.co.za Schalk Louw is a port­fo­lio man­ager at PSG Wealth.

sieems t like only yes­ter­day that we took down the Christ­mas dec­o­ra­tions, only to re­alise that nearly five months have al­ready passed in 2017. Bet­ter earn­ings growth in the re­sources sec­tor helped us to shake off the neg­a­tive year-on-year growth, but growth re­mains in the sin­gle dig­its while our mar­ket is again trad­ing above a priceto-earn­ings ra­tio (P/E) of 20 times. “Sell in May and go away,” they say. Roughly a year ago, I pointed out that May sell­ers haven’t been all that suc­cess­ful in the last 20 years. So what should we do? Should we be wor­ried?

We all know that mar­kets and share prices alike move up and down. But when we look at these trends in Graph 1 over the longer term (and by longer term I mean decades), two very im­por­tant de­tails be­come clear:

The first is that the gen­eral trend is up. Stock mar­kets are trad­ing higher to­day than they were 10, 20 or 50 years ago. In fact, it has de­liv­ered a re­turn of al­most 8% more than do­mes­tic in­fla­tion over the last 50 years.

Sec­ond, it may move up­wards, but it isn’t a one-way street and it def­i­nitely doesn’t come with­out pot­holes. These pot­holes or drops in mar­ket move­ments are also known as mar­ket cor­rec­tions.

Is the mar­ket cheap or not?

The mar­ket def­i­nitely isn’t cheap and at its cur­rent P/E ra­tio of 20.2 times, it is trad­ing much higher than its 20-year av­er­age P/E of 14.8 times. Many will point out, how­ever, that Naspers* makes up a large por­tion of the in­dex and that it is cur­rently trad­ing at a P/E of more than 96 times.

I also see more and more peo­ple that ex­clude Naspers from val­u­a­tions to try and jus­tify cur­rent mar­ket lev­els. The fact is, and will re­main, that Naspers does form part of the in­dex and by ex­clud­ing it from val­u­a­tions, you may just as well ask some­one to make you a peanut but­ter sand­wich with no bread. Rather use the FTSE/JSE All Share Limited In­dex (J303), which con­tains the same shares as the All Share In­dex, but with a 10% max­i­mum limit per share. In­ter­est­ingly, how­ever, even by us­ing this in­dex where Naspers is limited to 10%, the mar­ket is still trad­ing at a P/E of 19.4 times (see Graph 2).

So, sell in May and go away?

I al­ways en­joy test­ing the suc­cess of this well-known say­ing by run­ning his­tor­i­cal data. This year will be no ex­cep­tion. It may have served you well if you had fol­lowed this route in May for the last two years, but even this doesn’t guar­an­tee that another cor­rec­tion will fol­low. If you sold your FTSE/ JSE All Share In­dex shares at the end of May ev­ery year for the last 50 years, the mar­kets would have traded higher in De­cem­ber than in May dur­ing each of those years for 63% of the time. That means that the sell-in-May-bears would only have been cor­rect about a third of the time.

This year, I’ve de­cided to take things a lit­tle fur­ther. If you re­ally had to choose a month in which to sell, Jan­uary would be the more likely choice, sim­ply be­cause on a 12-month rolling ba­sis, it de­liv­ered the worst earn­ings over the last 50 years. Un­for­tu­nately, it doesn’t rhyme with “go away”. In fact, on a rolling 12-month ba­sis, May was the sec­ond-best­per­form­ing month out of the 12 months.

The bot­tom line is that al­though the mar­ket is priced quite high at the mo­ment, and in the midst of po­lit­i­cal in­sta­bil­ity we can­not nec­es­sar­ily ex­clude the pos­si­bil­ity of a cor­rec­tion, it re­mains im­por­tant to stay dis­ci­plined when it comes to your long-term as­set al­lo­ca­tion and to not give in to your emo­tions. Stay fo­cused on the pos­i­tive trend over the long term. *fin­week is a pub­li­ca­tion of Me­dia24, a sub­sidiary of Naspers.

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