Investment View: Why you should sit tight in May to see winnings

If you hold your money in cash or bonds you can expect to see inflation steadily eroding its value
Click to follow
The Independent Online

Sell in May, go away, buy again on St Leger day? Well, maybe you should have. The world's oldest classic horse race is still just over two weeks away but the FTSE 100 needs to recover some to hit its end-May close of 6,583.

However, the reason I'm updating my overview of the market now, as opposed to just before the Doncaster horse race from which one of the City's favourite sayings is derived, is that Hargreaves Lansdown has just published some research into the merits of buying in May and holding instead of going away. And it has found that as a general rule, selling in May is a very costly strategy.

According to the broker, investors who followed the proverb would have been better off only four times over the past 10 years (not including this year obviously) by selling in May (taking the sell point at 1 May rather than 31 May).

However, a buy and hold investor with £100,000 in the FTSE 100 on 1 January 2003 would have made £47,627 more than an investor who sold on 1 May each year and bought back on St Leger Day for 10 years.

In fact, Hargreaves Lansdown's figures show that a buy and hold strategy produced an average annual return of 9.11 per cent on the FTSE 100 from 2003 to 2012. Those who sold in May to buy back on St Leger day would have seen this return reduced by over a third as much, to an annual average of 5.59 per cent.

Another nugget to consider: in 2009 a sell in May strategy would have returned 5.52 per cent. Nice enough, but it would have meant missing out on most of the recovery as the FTSE All Share returned 30.12 per cent that year.

But what about this year? With the broker basing the numbers on selling on 1 May, on that date this year the FTSE 100 closed at 6,451.3, marginally beneath where it is now. If you'd sold in the middle of May you'd be smiling because it subsequently rocketed to a high of 6,840.3 on May 22 only to fall back just as quickly.

All this rather confirms HL's fundamental point: namely that trying to call the markets is a mug's game, and you only need to see how often the City's vast corps of exceedingly well-remunerated forecasters perform to see that.

Nonetheless, at the risk of being a hostage to fortune, I'll update my view of the market (which at the end of May was that you should hold).

Right now, stocks and shares still look a pretty good bet, particularly when compared with other asset classes. As we have heard repeatedly from the Bank of England's governor Mark Carney, monetary policy isn't likely to tighten for a long time. Which means if you hold your money in cash or in bonds you can expect to see inflation steadily eroding its value.

The UK stock market is probably trading at about fair value on a historic price-to-earnings multiple of 13.8 times, with a yield of 3.3 per cent (good luck with getting anything like that from a savings account).

HL's Adrian Lovelock says that's about par when considering the market's long-term historic valuation. By comparison, at 13.5 times, yielding 3.57 per cent the FTSE Europe is a bit cheap. Neither comes close to America's 18.4 times.

Of course, seeking value overseas brings currency risk with it. But then currency risk is something you have to factor in to the equation when considering the UK market.

The majority of the biggest companies in the FTSE 100, the performances of which have the most impact on it because they have the greatest weighting, are dollar companies.

Take the top 10 biggest. BP, Shell, HSBC, SABMiller, Rio Tinto, and BHP Billiton report results, and pay dividends in US dollars and cents.

Glaxo reports in sterling, but that doesn't change the fact that it's primarily a dollar company as regards earnings, while Diageo, Vodafone and British American Tobacco are multinationals that have substantial or even a majority of dollar or dollar-linked components.

Trouble is if you think predicting markets is hard, calling exchange rates is the stuff nightmares are made of. For the record, the pound fell sharply against the dollar in the middle of 2008 and hasn't come close to recovering, trading in a remarkably tight range since then.

Were it to start rising, you, as an investor, would lose because a rise in the pound would erode the value of your dollar earnings. Take your HSBC dollar dividend. With the pound weak(ish) right now it'll buy a lot of pounds. If the pound rises between now and the next time it pays, it'll buy less pounds next time around, and you lose.

With monetary policy pretty much fixed, the pound seems unlikely to rise much against the dollar soon. However, it is just worth pointing out that when the pound is strong, it's usually going to be a good time for sterling investors to buy into their own stock market.

In the meantime, nothing much has changed since I last considered the market. My recommendation remains hold.

And here's a new adage for May: Sit tight and you'll do all right.