HLBank Research Highlights

Strategy - Sell in May and go away – myth or fact?

Publish date: Fri, 20 May 2022, 11:17 AM
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This blog publishes research reports from Hong Leong Investment Bank

Our study of the “Sell in May and go away” phenomenon broadly suggests that it applies to the Malaysian market in the long run. Incidence of positive/negative KLCI returns were higher/lower during the Nov-Apr period vs May-Oct. Average returns of the bellwether index were also higher during the former period (3.6%) vs the latter (1.2%). Back-testing it, a portfolio strategy of “parking in a risk free asset from May-Oct and reinvesting from Nov-Apr” outperformed a standard “buy-and-hold the index” method by 50.3% over the past 20 years.

As the saying goes. “Sell in May and go away” – so goes the famous maxim by market participants. Evidently, this held true this month with the KLCI down -2.8% MTD (as at 18 May), while the regional ASEAN-5 has fallen by a larger quantum of -4.6%. Interestingly, the saying goes beyond just the month of May and in a broader sense, is used to describe the market’s historical underperformance spanning from May to Oct (i.e. the Northern Hemisphere’s summer period into Halloween). Proponents of this adage advocate staying out of equities from May to Oct and reinvest during Nov to Apr. In this report, we attempt to determine if this phenomenon applies to the Malaysian stock market.

The Malaysia experience. Our study looked at the historical performance of the KLCI over the past 20 years (2002 to 2021/22), breaking down the returns into two 6-month time horizons: May-Oct (the purported “go away” period) and Nov-Apr (the “stay invested” period). For the May -Oct period, the bellwether index showed equal probability of positive (50%) and negative (50%) returns with a simple average of +1.19%. This compares to a 75% positive return probability (i.e. 25% negative return probability) with simple average of +3.61% during the Nov-Apr period.

Generally true for Malaysia. While both time horizons showed positive simple average returns over the 20 year study – 1.19% for May-Oct and 3.61% for Nov-Apr – the latter was 3x higher than the former. Incidence of positive/negative returns was also higher/lower during the Nov-Apr period vs May-Oct. Using this, passive long term investors can undertake the following strategy: (i) stay out of the market from May-Oct and park their proceeds in a “risk free asset” – the 6-month FD rate in May averaged 2.90% p.a. or 1.45% 6-month-effective over the past 20 years, higher than the KLCI’s average return of 1.19% during that period and (ii) subsequently reinvest in equities from Nov-Apr, which yielded average returns of 3.61%. Such a strategy (i.e. sell-inMay and reinvest-in-Nov) would have generated a total portfolio return of 151.9% from May 2002 to Apr 2022 (CAGR: 4.7%), outperforming the “buy-and-hold index” method which generated returns of 101.6% (CAGR: 3.6%) over that same period.

Not to be taken literally. While our study supports the notion that the “Sell in May and go away” phenomenon broadly applies (in the long run) to the local bourse, we wouldn’t take it in its literal sense, but rather use it as a guide that the market has greater odds of outperforming in Nov-Apr vis-à-vis May-Oct. Coming back to fundamentals, we keep our end-2022 KLCI target unchanged at 1,680 (16.2x CY22 PE), banking on (i) Malaysia’s relative appeal amid the Ukraine-Russia conflict, (ii) sustained endemic reopening and (iii) possibility of an early GE15 (likely in Aug-Oct).

Source: Hong Leong Investment Bank Research - 20 May 2022

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