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Should you sell stocks in May?

May 05, 2015 08:39 IST

The Indian markets have lost ground 11 times in May since 1993.

A stock trader reactsRising oil prices, sub-par corporate performance in March 2015 quarter, retrospective taxation issues pertaining to foreign institutional investors and concern over sub-par monsoon at the domestic level amid fears of a possible rate hike by the US Federal Reserve (US Fed) in June have seen the Indian benchmark indices, the S&P BSE Sensex and the CNX Nifty correct sharply.

Since its peak level of 30,024.74 on March 4 2015, the S&P BSE Sensex has dropped nearly 3,000 points, or 10%.

May is traditionally considered a bad month for equity markets like Europe and the US as the fund managers there typically go on a long summer vacation.

Incidentally, the National Democratic Alliance government at the centre led by Narendra Modi also completes its first year in office this month.

So, should you sell in May and go away?

GLOBAL PRECEDENCE

As per data compiled by BS Research Bureau, the Indian markets have lost ground 11 times in May since 1993.

The fall has been as much as nearly 14% and 16%, respectively in 2006 and 2004.

However, in 2009 they rallied 28% when the post the election outcome that saw the United Progressive Alliance government take charge for the second consecutive term.

May 2014 also saw the markets gain 8% after Narendra Modi-led NDA got an overwhelming mandate post the general elections.

At a global level since 2004, Asian markets (ex-Japan) have lost ground on 7 occasions in May. While 2012 saw the Australian market slump 17%, China, Hong Kong, Japan and the ASEAN region saw their respective markets decline 9% -- 12%, data suggests.

Going ahead, analysts warn that potential downgrades in earnings and overall negative sentiment from global and domestic developments could result in a sharp correction in several expensive stocks at a global level.

Credit Suisse, for instance, suggests that while they are not really believers of the old adage 'Sell in May and go away', they do recognise that with MXASJ (MSCI Asia ex-Japan) and MXJP (MSCI Japan) indexes at their highest levels since 2007, the temptation to book profits could be high.

"We continue to be overweight the cheapest four markets -- MSCI China, Korea, MSCI Hong Kong, Taiwan - and our big Underweights remain Australia and ASEAN. Countries with the biggest consensus EPS (earnings per share) downgrades in April are India (-1.5%), Australia (-1.4%), Thailand (-1.3%) and Indonesia (-1.1%)," point out Sakthi Siva and Kin Nang Chik of Credit Suisse in a recent report.

Despite these concerns and a fall of nearly 10% from its peak, G. Chokkalingam, founder and managing director, Equinomics Research & Advisory believes that the Indian markets could recover 3% to 5% during May.

"Buoyant tax collections, healthy forex reserves, better-than-expected March quarter results of select manufacturing companies augur well for the Indian economy.

"Weak US GDP data could delay the rate hike by the US Fed, which is also a positive for global equity markets.

"This is a good opportunity to follow the bottom-up approach and buy good quality, attractively valued stocks.

"Among individual stocks, I prefer Cairn India, Biocon, Karur Vysya Bank, Axis Bank, Claris Lifesciences and JB Chemicals," he says.

U R Bhat, managing director, Dalton Capital Advisors, too, believes that the rate hike by the US Fed is some time away given the recent economic data. He remains positive on the outlook for markets in the month of May.

"At the global level, issues pertaining to Greece are also almost settled now.

"On the domestic front, the markets, to some extent, are factoring in the March corporate results and the outlook for monsoon.

"I don't think that the Nifty should break 8,000 on the downside and the upside is likely to be capped around 8,750 levels," he says.

Image: A stock trader reacts. Photograph: Reuters

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Puneet Wadhwa in New Delhi
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