• The global stock market could be nervous ahead of potentially weaker returns in the upcoming six-months in line with historical performance over the past 20 years.

• Based on our study, the FBMKLCI index is less affected by the “sell-off” in summer months, although historically, it has posted lower average returns over a 6-months period from May-Oct against the period from Nov-Apr.

• Nonetheless, we are cautiously optimistic that the FBMKLCI could maintain its upward trajectory and reach our year-end target of 1,720 points in 2024.

“Sell in May and Go Away” is one of the market anomalies based on the historical stock market underperformance during the six-month period from May to October. This anomaly is particularly prevalent for the S&P500 index, DJIA Index and FTSE 100 index, which recorded lower gains during the summer months in at least 14 out of the past 20 years, equating to a 70% predictability rate. The lower gains registered during this period coincides with the custom in the West of leaving and escaping the cities during the six “summer” months. Due to its predictability, this anomaly presents an opportunity for investors to time the market by selling stocks in May and buying them back in November.

However, we observed that this anomaly does not hold true for the FBMKLCI Index, which exhibits poor predictability at only 55%. Intuitively, this is due to the difference in local customs, owing to its classic equatorial climate characterized by high temperatures and wet months throughout the year. Despite that, the local bellwether still recorded lower average 6- months returns during May-Oct period at 1.61%, compared to Nov-Apr average returns of 3.68%. We think this was influenced by the year-end rally typically observed in Nov and Dec that apparently has lifted all indices within our study.

In addition to the observed trends in the Nov-Dec period, we also noticed that global stock indices tend to perform well in the months of April and July. Hence, should there be any sell-off in the stock market during the May-Jun period, investors may consider increasing its risk exposure to the market towards the end of June, in anticipation of a potential slight market rebound in July.

Having said that, we expect positive momentum in local stock market to continue supported by sanguine economic outlook with economic activity projected to grow between 4.0%-5.0% in 2024. Besides that, we also expect the market to benefit from investors’ portfolio rebalancing in anticipation of a US Federal rate cut. The undervalued Ringgit and the attractive valuation of the FBMKLCI are poised to emerge as the primary drivers for foreign investors to return to the market.

The fact that negative foreign flow which stands at RM2.8bn YTD further exacerbates the potential buying interest in the local market should the US Federal Reserve proceed with the expected rate cut. As we anticipate at least a 50-basis points rate cut for 2024, investors should closely monitor US unemployment rate and inflation data that is expected to be released on 3rd of May and 15th of May respectively, for cues on US Fed’s next move. All-in-all, we maintain a cautiously optimistic outlook, expecting the FBMKLCI to continue its upward trajectory towards our year-end 2024 target of 1,720 points, which is less than 10% away from the current level.
 

Source: BIMB Securities Research - 30 Apr 2024