April 19, 2013 5:32 pm

Spring heralds another seasonal sell-off

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“The same procedure as every year,” is the catchphrase in Dinner for One, a 1960s British comedy sketch still, bizarrely, repeated every New Year’s eve on German television.

It also captures the market mood this week as investors wondered whether global falls in equities would end up as a repeat of steep sell-offs seen around the same time in each of the past three years.

The US S&P 500 suffered its worst week since last November – closing down 2.1 per cent down on the week. The FTSE Eurofirst 300 fell to its lowest this year, although it edged up on Friday.

It looked an eerily familiar scenario of a rally in the first part of the year going into reverse. Last year, the FTSE All-World index declined 13.4 per cent between April and June. In 2011, it fell a quarter between May and October.

Market indices

Market indices

“While we’re not inclined to invest based on some simple rule or rhyme, those investors who followed the adage ‘go away in May’ have done quite well in each of the past three years,” says Jonathan Golub, UBS strategist.

In Dinner for One, a drunk butler staggers as he empties the wine glasses of make-believe guests at a 90th birthday party. As in previous years, market tipsiness caused by extraordinary central bank action could prove temporary; more worrying would be if the sell-off reflected longer-lasting fears about global growth and the effectiveness of central bank actions.

This week’s falls were triggered by weak Chinese first-quarter growth data, exacerbated by the International Monetary Fund downgrading its forecast for global growth this year by 0.2 percentage points to 3.3 per cent. At the IMF’s spring meeting in Washington, central bankers also struck a cautious tone about all the steps they have taken. “We don’t really know what is happening in advanced economies,” said Lorenzo Bini Smaghi, a former European Central Bank board member.

Albert Edwards, Société Générale’s famously bearish global strategist, warns “there has been immense confidence in policy makers” and a decline “will cause a very large correction in asset prices”. Falling commodity prices were already sending warning signals before this week, he notes. “Equity markets have woken up in the past week to what the commodity markets have woken up to in the last month – the global slowdown.”

The economic numbers are not as good as people think they are. In 2008, economies were growing and EM was strong. Our situation is far more precarious today

- Bob Gelfond, MQS Management

Bob Gelfond, chief executive at MQS Management, adds: “The economic numbers are not as good as people think they are. In 2008, economies were growing and EM [emerging markets] was strong. Our situation is far more precarious today and European financial stress can easily derail the US and other markets.”

Economic news recently has certainly underwhelmed: Citigroup’s G10 “economic surprise” index – gauging developed economies data against expectations – turned negative in late March, encouraging investors to focus on fundamental weaknesses in many economies. “When the economic surprise indices turn negative, markets tend to get more sensitive to each data point,” says Hans Lorenzen, Citigroup strategist.

Strikingly, the G10 “economic surprise” index has followed a similar seasonal pattern to global equity markets. Over the past decade, falls seen in the second quarter of the year have on average been more than matched by a rise almost twice as big in the final three months of the year. One explanation is that statisticians have struggled to adjust data for normal seasonal variations since the collapse of Lehman Brothers in September 2008 was followed by dramatic economic contractions in activity in just a few months.

Yes, we have had a spring slowdown in the past three years, but we have also had an autumn awakening

- Robert Farago, head of asset allocation, Schroders

But if equity market history is repeating itself, a rebound would follow later this year. “Yes, we have had a spring slowdown in the past three years, but we have also had an autumn awakening,” says Robert Farago, head of asset allocation at Schroders private bank. “It has been a seasonal pattern rather than a sign of impending doom.”

The spring share sell-offs could simply reflect market psychology. Investors start the year feeling optimistic, with fresh money to allocate – and time for investments to work. By the second quarter they are ready to take profits and go on holiday.

This year’s sell-off could be less pronounced, argue some. In the past three years, the second quarter was marked by an escalation in the eurozone debt crisis. ECB action followed later in 2011 and 2012. But this year markets have been scarcely rattled by the Cyprus crisis or Italy’s continuing political stalemate. “We don’t expect as significant weakness because we don’t see the European sovereign crisis spiking again,” says Emmanuel Cau, European equity strategist at JPMorgan.

Meanwhile, central banks’ actions aimed at driving investors into riskier assets will not be unwound any time soon – and the Bank of Japan’s aggressive plan to reinflate the country’s economy has only just been launched. With bond yields remaining depressed, that will continue to make equities look attractive to many investors. Johannes Jooste, chief market strategist at Merrill Lynch Wealth Management, says: “If there is a little bit of herding going on because of seasonality, it provides a savvy investor with opportunities.” Just like last year.

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