One of the popular adages in the stock market says “sell in May and go away”. This strategy consists of selling stocks in May and buying them back at a lower price later on. This adage is based on the belief that stock markets underperform between May and October as most people are out on vacation.
The 'sell in May..' strategy has shown mixed results over the last five years. An examination of the trend shows that the benchmark Nifty has given positive returns during this six-month period (May to October) in three out of five years. From May to October 2017, Nifty surged over 11 percent and in the same period of 2016, it gained over 6 percent.
However, this is May is different. The coronavirus-led disruption has shaken the global financial markets and battered the business models of many industries. The pandemic has infected well over three million people globally and has resulted in nationwide lockdowns, halting economic activities, disrupting supply chains and weakening investor risk appetite.
The domestic equity market has been under pressure since the start of this calendar year with Nifty falling almost 20 percent YTD. Markets witnessed a brutal sell-off in March, slumping over 23 percent. However, a sharp rebound followed in April and the Nifty gained around 20 percent during the month.
Analysts believe that the Indian markets could slide further as the fundamentals remain weak. The nationwide lockdown has resulted in zero sales for major automobile companies and has also hit the aviation and hospitality sectors. Corporate earnings are expected to be hit badly in the first quarter of FY21 due to the nationwide lockdown that began in the last week of March.
“Markets are expected to correct in May after a decent rise in April. Stock-specific volatility may rise as we enter the earnings season and the release of monthly sales data from the automobile companies which will be near zero,” said Kunj Bansal, MD & CIO, Sarthi Capital.
Investor participation has also taken a hit. Foreign investors have pulled out Rs 6,884 crore during April from the Indian equity markets. However, the outflows are much lower than the Rs 61,973 crore recorded in March. So far this year, For the year till date, foreign investors have net sold Rs 54,914 crore of Indian equity.
The pace of recovery in the global economy will be key to further capital flows into emerging markets in general, including India, market watchers say.
“Markets are likely to witness profit booking. The first quarter of fiscal 2020 is a complete washout for the entire industry and economy. Investors would remain cautious while there are nervousness and overvaluations in the market,” said Sudip Bandyopadhyay, Group Chairman, Inditrade Capital.
Bandyopadhyay believes that there is a huge amount of foreign capital ready to invest in India, but he does that money to flood the market in May.
Vinod Sharma, Head - PCG & Capital Market Strategy, HDFC Securities too expects investors to book profits after the good run in April. He pointed out that the rebound in April came despite foreign investors being net sellers.
“The sharp rise in the recent past might trigger a wave of profit booking in the month of May, but the market is very light in open interest terms," Sharma said.
"Barring the low stock future OI for the month of April, the OI is at a 3 year low and 40 percent lower than the all-time high,” he said.
Besides capital flows, market performance in May will also depend on stimulus packages announced by the government, the number of fresh COVID cases post-lockdown and the mood in international markets, Sharma said.
“We do not believe in the 'Sell in May and Go Away' theory as markets have risen on an average 0.65 percent in the month of May. Out of the 30 odd Mays, the markets have closed with gains in 18,” Sharma said.
The government and the Reserve Bank of India (RBI) have announced multiple measures to support the economy and various sectors.
Bandyopadhyay feels that the quantum of the stimulus package so far from the government is inadequate given the damage to the economy
“The government is carefully examining the situation and may announce some more measures favoring various sectors,” he said.
Markets are expecting another round of fiscal stimulus from the government to repair the knock to economic growth as a result of the nationwide lockdown.
“A likely stimulus package from the government should support small and medium enterprises, focus on job creation and help the small trader community,” Bansal said.
Meanwhile, a steep fall in crude oil prices augurs well for the rupee but foreign investor selling in shares could offset those gains.
“The rupee could rise a bit, but is unlikely to strengthen above 74.70 (to the dollar),” Sharma said."correct" - Google News
May 04, 2020 at 07:13AM
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Sell in May and go away: Indian shares could correct after April rally, feel experts - CNBCTV18
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