Investment View: If you want a tip, ignore the old saying and keep hold of your shares

At the risk of being a hostage to fortune I wouldn't be selling today and going away
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The Independent Online

Sell in May and go away, buy again on Leger day. It's one of those famous stock market sayings. The proverb holds that you should enjoy an extended spring/summer break from stocks and shares until Britain's oldest classic horse race has been run at Doncaster on Saturday 14 September. When you should pile back in.

Well the end of May is upon us. The Derby, the most prestigious (and richest) classic is run on Saturday, the first weekend in June, and you've got just a day left if you want to follow the advice on the racing pages and plough some of your profits into a bet on the short-priced favourite for the big race, Dawn Approach. Good luck with that.

An analysis I did a couple of years ago suggested that there were as many instances where it was much better to sit tight at this time of year and even buy, as opposed to selling up in the hope that shares will have fallen by the time the St Leger is run, thereby allowing you to get back in at a cheaper price.

But this year has seen a strong rally in share prices, followed by a wobble. So is the stock market going to run out of puff during the slow summer? Is this a year when the old adage could prove to hold true?

To answer this question I sought advice from the pros, in the form of Legal & General's Lars Kreckel, who is the global-equity strategist for a company that is one of the biggest investors on the stock market.

I wanted to find out how the market looked in terms of valuation vis-a-vis its historical performance, both in terms of its earnings multiple and its dividend yield, to give an idea of where it stands in the wake of this year's rally.

Mr Kreckel's view is that while it is "difficult to say that equities are cheap" there aren't any signs, yet, that the market's performance has led to a bubble, or the sort of inflated share prices we saw in the dot.com era at the end of the 1990s.

The 12-month forward multiple, or the price of the shares of the companies in the FTSE 100 index divided by their earnings (p/e) stands at 11.9 times. In fact, that's actually bang in line with the historical average of just over 12 times.

The forecast yield, however, stands at 3.9 per cent, which is a bit above, and also well above what you would get from either government bonds or from holding cash at the bank.

Back in the year 2000, when the dot.com bubble reached its peak, the multiple was more like 20 times. However, at its low point in 2009 it bottomed out at about 8 to 9 times.

Mr Kreckel explains that the rise in share prices since 2009 has been driven "largely by a profit recovery and reduced risk". Plus the "quantitative easing" or bond buying by the Bank of England, which has depressed the returns from bonds.

Companies are making good money again, while big investors are somewhat less scared than they were about the worryingly wide array of economic problems which keep strategists like Mr Kreckel and his colleagues up at night.

In 2009 those risks included a widespread fear that the world was going to enter a deeper recession thanks to slowing growth in China, the US "fiscal cliff" and the unwillingness of Congress to even think about a deal, and the ongoing travails of the eurozone.

As it turned out, there are signs that the world's economy is recovering, even Britain is picking up a bit (with absolutely no thanks to the Chancellor, George Osborne) and the eurozone is, well, at least it's not in a crisis at the moment.

Looking forward, however, the outlook for corporate profits is less than stunning, and while America is OK, Europe is still giving off the impression that it wouldn't take much for it to be back in a really big mess. If it's not still in one.

The eurozone economy is deep in recession and some countries (I'm looking at our Gallic neighbours across the Channel here) haven't even got started on sorting their problems out. If there's going to be something to act as a catalyst for a greater correction to the stock market I'd be thinking eurozone right now.

Problems in the single-currency community have a habit of building quietly and then blowing up, almost as if from out of nowhere.

That said the FTSE 100 is still well below its international rivals in terms of p/e. America and Japan are both over 14, and even Europe is on over 12.

Our market has traditionally traded off a lower p/e because of its "defensive" characteristics. Basically, it's got a lot of solid, but relatively, lower growth companies that make money and pay dividends but might not set the world alight.

But that FTSE 100 discount when compared to the valuations of rival indices overseas has been much bigger than it stands at today.

If you were treating the market like an individual stock, this column's recommendation would be "hold".

You may be in for a bumpy ride, but equities are still a much better bet than rival asset classes. Or than gambling that Dawn Approach will stay a mile and four furlongs at Epsom.

It's true that you may have to put up with a bit of turbulence, and the market's valuation doesn't make now the cheapest time to buy shares. However, at the risk of being a hostage to fortune I wouldn't be selling today and going away.

The stock market probably won't be massively cheaper on St Leger day.

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