Should you sell stocks in May?

Potential downgrades in earnings and a negative sentiment could result in a sharp correction in several expensive stocks globally

Rising oil prices, lower than expected corporate earnings for the March quarter, issues pertaining to retrospective taxation on foreign institutional investors (FIIs), concern about a sub-par monsoon this year and fear of a possible rate increase by the US Federal Reserve in June have led to a sharp correction in the Indian benchmark stock indices. Against its peak of 30,024.74 on March 4, the Sensex has dropped about 3,000 points, or 10 per cent.

Traditionally, May is considered unfavourable for equity markets such as Europe and the US.

According to data compiled by BS Research Bureau, since 1993, Indian markets have lost ground 11 times in May. In 2006 and 2004, the fall stood at 14 per cent and 16 per cent, respectively. However, in 2009, the markets rallied 28 per cent in May, when the United Progressive Alliance came to power at the Centre for a consecutive term. In May 2014, the markets gained eight per cent, following the National Democratic Alliance securing an overwhelming mandate in the general elections.

Since 2004, Asian markets (excluding Japan) have lost ground in May on seven occasions. While 2012 saw the Australian market slump 17 per cent, China, Hong Kong, Japan and the Association of Southeast Asian Nations (Asean) saw their markets decline 9-12 per cent, data show.

Analysts caution potential downgrades in earnings and an overall negative sentiment could result in a sharp correction in several expensive stocks globally. Credit Suisse, for instance, says while it doesn’t believe in ‘selling in May’, with the MSCI Asia (excluding Japan) and MSCI Japan indexes at their highest since 2007, the temptation to book profits could be high.

“We continue to be overweight on the cheapest four markets — MSCI China, Korea, MSCI Hong Kong, Taiwan — and our big underweights remain Australia and Asean. Countries with the biggest consensus EPS (earnings per share) downgrades in April are India (-1.5 per cent), Australia (-1.4 per cent), Thailand (-1.3 per cent) and Indonesia (-1.1 per cent),” say Sakthi Siva and Kin Nang Chik of Credit Suisse.

G Chokkalingam, founder and managing director, Equinomics Research & Advisory, says the Indian markets could recover three-five per cent in May. “Buoyant tax collections, healthy forex reserves and better-than-expected March quarter results of select manufacturing companies augur well for the Indian economy. Weak US GDP data could delay a rate rise by the US Fed ... This is a good opportunity to follow a bottom-up approach and buy good quality, attractively valued stocks. Among individual stocks, I prefer Cairn India, Biocon, Karur Vysya Bank, Axis Bank, Claris Lifesciences and JB Chemicals,” he says.

U R Bhat, managing director, Dalton Capital Advisors, says a rate rise by the US Fed is some time away, given the recent economic data. “At the global level, issues pertaining to Greece are almost settled. On the domestic front, the markets, to an extent, are factoring in the March corporate results and the outlook for the monsoon. I don’t think the Nifty should break 8,000 on the downside and the upside is likely to be capped at around 8,750,” he says.