The ASX200 Index closed the month of April up 2.33% making it the fourth consecutive month of positive gains. That’s a 17.33% rally since Christmas Eve. The Dow Jones Industrial Index closed the month up 2.56%, whilst the French CAC was up +4.40% and the Singapore Index was up 6.21%. The only two indices to closed in the red were the Shanghai Composite which closed -0.41% and the Indian index which was down -0.18%. On the local bourse, IT stocks were the clear stand out rising 8.15% following a raft of M&A activity. Consumer Discretionary, Banks and Financials also fared well rising 4.43% and 4.40% respectively. The expectation is that the RBA will cut interest rates twice by late next year which help buoy the ASX 200 index performance. The market was also supported by a sustained recovery in commodity prices, a recovery in bank stocks and resistance of consumer discretionary short seller targets.
On the economic front, the Australia Q4 GDP growth was disappointing. It rose by 0.2% quarter on quarter with annual growth remaining at 2.3% year on year. The Q1 CPI inflation reading was lower than expected as well and sits below the RBA’s 2%-3% target band. The unemployment rate sits at 5.0% in March which is at a 8 year low and remains a highlight in the economy. Business investment spending and Government spending are both up. On the positive side, there are early signs that the housing downturn together with housing prices are starting to bottom.
May market Outlook
Does the old adage “Sell in May and Go away” hold true? As May hits, everyone sells and for no apparent reason and buys back in July-November. Its origins come from an old English saying “Sell in May and go away, and come on back on St. Leger’s Day.” It refers to the custom of aristocrats, merchants and bankers who would leave London and go on vacation during the summer months. St. Leger’s Day refers to the St. Leger’s Stakes which is a horse race in mid-September. Investors buy back once the brokers have returned. US investors go on vacation between Memorial Day (29 May) and Labor Day (4 Sep) and tend to mimic this trend. Thus we have adopted the phrase as an investing adage. The thing is, gone are the days when stockbrokers pack up and go on vacation during summer to return in time for a sporting event. These days markets trade globally and around the clock. So technically the phrase is nonsense. It’s more of a self-fulling prophecy than anything else. So should you sell in May?
Based on the average percent change from 1996-2016, it’s much of a muchness. Given that Australian banks make up some +40% of the market, it’s important to gauge how the big 4 banks will perform in the upcoming bank reporting season. ANZ has reported a 5% fall in its 1H profit but the result was better than expected sending shares up almost 3% on the day. Dividend was maintained at 80c and bad debts fell. ANZ’s chief executive officer Shayne Elliott said the bank’s decision to take a more risk averse stance in home lending negatively affected the result. Whilst there are concerns on Bank results, we think much of the downside is already factored in and a property collapse will be avoided.
It is important to keep in mind that the ASX 200 is at its highest level in almost 12 years since before the global financial crisis. Even though the RBA kept rates at 1.50% for the 30th monthly meeting in a row, markets are pricing in a greater-than 70% chance of rates falling by the August RBA meeting. The central bank is looking for further falls in unemployment or underemployment to boost inflation, otherwise there is a good chance it will cut. As a result, we don’t expect rates to stay at this level for much longer. There is also an increasingly like an odds-on Labor election win in May which means the scrapping of excess franking credits as well as changes to capital gains tax discounts and negative gearing. And finally, US President Donald Trump has threatened to go through with his trade tariffs on China from 10% to 25%. This has sent jitters through markets as there is now a renewed escalation of the US-China trade war, a definite drag on the respective economies. All negative factors to global markets in May.
Could the ‘Sell in May and Go Away’ adage repeat itself once again?