Three thoughts on the “Sell in May and go away” adage:
- The non-action of Bank of Japan (BOJ) has triggered the May’16 correction.
- The May’16 correction will likely last to June’16, at least.
- Watch out for event risk in G7 Summit and Brexit referendum.
- The non-action of Bank of Japan (BOJ) has triggered the May correction
The May’16 correction has begun with the MSCI Asia Pacific Index declining 3.1% in the first week of May 2016. In our previous newsletter (“Quantitative strengthening of Japanese yen”), we warned that the Japanese Yen will likely remain strong with minimal intervention by BOJ. This is to demonstrate the importance of leadership by Prime Minster Abe in the upcoming G7 Summit in May. Therefore, it did not surprise us when BOJ chose to maintain its existing monetary policy, disappointing the consensus call for further monetary easing in its meeting on 28 April 2016. The USDJPY surged 4.8% from ¥111.46 to 106.41 over the next three days. This strong rise in the Yen triggered the slump in the equities, marking the start of the May’16 correction.
2. The May correction will likely last to June, at least
The validity of the “Sell in May and go away” adage cannot be ignored. MSCI Asia Pacific has corrected 7 times in the month of May in the past ten years. The steepest correction occurred in 2012 with a decline of -10.2%. The longest consecutive months of correction was in 2008 when the markets fell over a period of 7 months. History has also shown that the markets will likely to correct for at least 2 months into June if the May correction is confirmed.
Ten-year seasonality chart of MSCI Asia-Pacific Index
3. Watch out for event risk in G7 Summit and Brexit referendum
The G7 Summit and Brexit referendum will be the two key macro events to watch out in May and June 2016. The G7 Summit will be held in 26 – 27 May 2016 in Japan. There are expectations that Prime Minster Abe may lead the G7 countries in implementing fiscal stimulus to boost the global economy. Thus, this may lead to short-covering as we approach the event.
In addition, UK is poised to go to the polls on 23 June as they vote for the referendum on whether it wants to stay in or exit the European Union (EU). Even political leaders such as US President Barack Obama and Japanese Minster Shinzo Abe has warned of repercussions if UK choose to exit EU. Obama has warned that Britain would “join the back of the queue” in seeking a bilateral trade deal with Washington if it were to leave the EU.
The next two months will likely be volatile months with macro uncertainty arising from the two key macro events of G7 Summit and Brexit referendum. Therefore, it will be prudent for investors to be patient and only opportunistically add positions when there is pain in the markets.