On D-Street, odds favour ‘Sell in May’

This time, however, the odds of it playing out are higher as markets contend with a host of challenges such as the impact of the US Federal Reserve’s expected monetary tightening on the economy, and elevated commodity prices due to the ongoing Russia-Ukraine war and surging Covid-19 cases in China.

“Sell in May and go away hasn’t worked in most markets but because of what’s happening with the Fed, earnings not being good and other factors, this adage may work for the first time in a number of years,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies. “It is not just the Fed hike, the markets will also grapple with prolonged conflict in Ukraine, commodity inflation and surging Covid-19 cases in China.”

ET Bureau

The proverb is believed to have originated in England centuries ago when participants in London’s financial district saw that returns from investments were adversely affected in the summer. Data show the Sensex has ended in the red for May only thrice in the last 10 years. However, this time around, macro-economic and technical factors are not supportive of an optimistic outlook.

On Friday, the Nifty ended above the psychologically crucial 17,000-mark after swinging between gains and losses for most of the week. The uncertainty over the market direction has resulted in traders keeping their outstanding bets lower.

Money managers said Fed’s quantitative tightening could limit foreign flows and its rate hikes could hurt Indian companies’ earnings. These developments could also force the Reserve Bank of India to raise rates. It could hurt global growth as well.

The US Fed’s meeting ends on May 4 and the public issue of India’s largest financial institution LIC is also set to open on May 4 and close on May 9. LIC’s IPO could also have some impact on market liquidity though money managers don’t see it as a major concern.

With the earnings season for the quarter ended March signalling that the coming months could be challenging for Indian companies, investors are taking a step back.

“Given the current earnings season, how it has progressed, and commodity cost pressures – we may not see any earnings upgrades in the near term,” said Harsha Upadhyaya, CIO-Equity at Kotak Mahindra Asset Management Company “Valuations are on the expensive side so the market upside is capped and market moves will be dependent on liquidity flows.”

Nifty’s one-year forward PE is at 19.2 times, which is at a 21.5% premium to its 16-year average and remains well above one standard deviation from its historical average levels, according to CLSA. The S&P BSE Sensex closed lower for April, down 2.6% to 57,060. Nifty ended 2.1% lower for the same period to close at 17,102.50.

Derivatives analysts said banks, which have the highest stock weights on the Sensex and Nifty, are underperforming. The bearish positions created by foreign investors in banking futures remain. “With these concerns, the month of May is unlikely to be a fruitful one. Data pointers show it is better to take a sell in May and watch from the bay kind of approach,” said Siddarth Bhamre, research head at Religare Broking.