The 'Sell in May and go away' conundrum

SINGAPORE - The feeble performance in the stock market thus far this month suggests that investors may do well to again heed the advice which was first made famous by the great US writer Mark Twain: "Sell in May and go away."

One reason for the dour sentiment is the downbeat earnings reports from local blue-chips. This has put the question mark on whether there will be any further upside in stock prices when companies are not, in general, painting a more upbeat note of their businesses.

For me, what is of particular interest is the first quarter results posted by the three listed banks. This is because they account for a significant portion of the benchmark Straits Times Index.

In fact, it was largely due to the gains made by the three banks in April last year that helped to propel the STI to a then eight-year high of 3,539.95.

But worries over their loan exposure to the troubled oil and gas sector in February was partly the reason for causing the STI to tumble to as low as 2,538.28.

At that level, this would mean that the widely-watched index had plunged by as much as 1,001 points over a span of 10 months.

I can only recall three other instances when STI's collapse had been more serious in value terms - during the 1997 to 1998 Asian financial crisis; the bursting of dotcom bubble after 2000; and the 2007 to 2008 global financial crisis.

Although there was a subsequent rebound, this was achieved on declining market turnover, and STI has not been able to re-scale the 3,000 point level which it had slipped below since November.

Worse, STI appears to have resumed the downward trend, with its recent decline bringing it below the important 2,800 psychological support again.

This has renewed concerns that if the market were to encounter another bout of strong selling pressure, like in February, the STI may crack once again, given the recent dearth in buyers.

Now to examine the three banks' recent report cards and what they can tell us about the market fundamentals and STI going forward.

One useful analysis comes from CIMB which notes that while the recovery in oil prices has eased concerns over the three lenders' exposure to the commodities sector, this has been replaced by new worries are over a possible slowdown in revenue growth as the economy weakens. Then there are the cracks which recently appeared on the banks' loan asset quality.

CIMB said: "DBS recognised new non-performing assets for a steel manufacturer in India and spillover of Hong Kong corporates' defaults on renminbi hedging activities from the fourth quarter of last year.

"OCBC continued to recognise non-performing loans for oil and gas as customers requested to restructure loan repayment terms. One of UOB's clients with commodities exposure in Canada and Australia saw cashflow problems."

CIMB then gives the thumbs down, downgrading the banking sector to "neutral" from "overweight" - not exactly good news for any investors who are hoping for a rebound in the STI.

Besides the market fundamentals which are partly driven by how well the banks will perform, STI's performance will be influenced in large part by investors' sentiment and a good gauge is the international fund flow.

The fund flows update reports produced by OCBC Bank show that since last month, the flow of money in and out of funds investing in regional markets such as Thailand, Indonesia and Hong Kong only amounted to tens of millions of dollars each week.

This is a far cry from the billions of dollars which these funds had encountered during their hey-day a decade ago when Southeast Asian markets were the toast of investors across the globe.

The only consolation is a palpable slowdown in the outflow of money investing in China equities. From a net outflow of US$670 million in the last week of March, redemptions had slowed down to US$203 million for last week.

Whether this is due to fears receding of a China's hard landing, or those who wanted to sell would already have sold out is difficult to tell. We will need more data before we can decipher the Chinese market's trend.

Still for me, how stock prices will perform - both here and elsewhere - will depend on what the Fed does at its next interest-rate fixing meeting in June.

The Fed had previously indicated that it would make do with two interest rates hikes this year, instead of four.

But the only chance of it doing even that will be to have one rate hike at the June meeting or, at the latest, its July meeting - and one hike in December at its final meeting for the year.

This is because the US presidential election campaign - after the Republican and Democratic presidential nominees are determined in July - will put everything else on the backburner until the winner is decided in November.

For an inkling of what the Fed may be thinking, the April US job data, due out on Friday, will be one set of information which will be examined in earnest by traders and economists.

In the strange world that we now find ourselves, a weak set of jobs data will be greeted with jubilation as this signals that the US economy is growing slower than expected and this will make the Fed stay its hands on an interest rates hike.

But there are times when central banks move in ways which is contrary to what the market expects.

Just ask the traders in Tokyo who were expecting even looser monetary measures from the Bank of Japan to dampen the recent rise of the yen.

When that failed to materialise, they took fright and fled. They left a collapsing Tokyo stock market in their wake and lent further credence to Mr Twain's observation to sell in May and go away.