Published April 27, 2009

Analysts expect pullback in May but see bright side

Profit-taking unlikely to bring market down to March low and presents buying opportunity

By TEH HOOI LING

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(SINGAPORE) Sell in May and go away, so goes the saying on stock markets. Will this play out this year, given that 2009 thus far has been anything but a typical year?

Analysts The Business Times spoke to generally think there will be profit-taking next month. But the positive spin is that the expected price weakness may be a buying opportunity for more intrepid investors.

'Yes, the typical doctrine of 'selling in May and going away' will still work this year,' said Kenneth Ng, CIMB-GK's head of research. 'The market is looking a bit tired. It has rallied ahead of fundamentals.'

However, he reckoned that the selling in May will not bring the market down to the March low.

'There is a lot of liquidity on the sidelines and governments are pulling out all stops to stimulate the global economy. We may see a big, big bear rally in the next few months, which will break the current high.'

Between March 9 and April 15 this year, the Straits Times Index soared 449.04 points or 30.8 per cent, briefly rising above the 1,900 level.

The stock benchmark has since given up some of the gains, but at last Friday's close of 1,852.85, it is still 27.2 per cent higher than the low of 1,456.95 on March 9.

Mr Ng thinks it is still a bear rally because the fundamental problems of the world economy have not gone away. Demand has slumped and the balance sheets of consumers and banks will need time to be repaired. It is still not clear as of now if all the stimulus packages will have the desired multiplier effect in the economy.

'The consensus underweight in equities has led to low exposure to equities. Now, what we are seeing is that markets no longer fall on bad news. And any news that's not as bad as expected is likely to spark a buying frenzy. People are afraid to underperform.'

NetResearch Asia managing director Kevin Scully also believes investors will take some profit off the table given the pretty strong run-up in prices in the last six weeks or so. 'By May, most of the first quarter results will be out. Investors will decide to take profit.'

Explaining the recent rally, Mr Scully said the low in March was a result of panic selling on an end of the world scenario. 'Now, people are beginning to think it's not end of the world, and so some money has gone back to the markets,' he said.

Also, there was a severe depletion of inventories as orders dried up last December and in January. But in the last couple of months, there has been some restocking.

'But a lot of companies will be using up the fat and surpluses in the coming months. If by then, the credit has not loosened and the consumers have not come back, we will see more corporate failures,' he said.

Meanwhile, corporate lay-offs have continued to take place. Also, many banks still need to recapitalise. 'Is the rally pre-mature, has valuation gone too high? By mid-May, we will know if this is a bear rally. Many funds still believe it is.'

Lim Say Boon, chief investment strategist at Standard Chartered Bank Group Wealth Management, shared similar sentiments.

'Our strategy is to buy the dips. We expect there will be further corrections. So we are not keen to chase the rallies.' But he noted that there is value in a range of risk assets including stocks. For example, US equities have fallen lower in price-earnings terms on only two other occasions - the Great Depression and the 1970s/early 80s stagflationary bear market.

'While this recession is arguably the worst since World War II, we do not regard this as a new great depression,' said Mr Lim. Policy makers have much greater monetary policy flexibility today and they are using that very aggressively. Comparisons to the 1970s/early 1980s are also not helpful because of huge interest rate differences - interest rates being the discount factor used in valuations.

'So yes, there will be dips. May? Possibly, in conjunction with the results of the bank stress tests. We don't chase the rallies but we would cost average on the dips,' he said.

Even the CLSA's tongue-in-cheek Feng Shui Index points to May being a weak month for stocks. According to the firm, May 5 to June 4 is the month of earth snake. 'Beware the slippery Snake! Many pockets will be bitten hard this month,' it warned.

So there is near consensus of profit-taking in May. But given how the market works, it still may not be a sure bet - often when just about everyone is expecting an event and preparing for it, the particular event has a tendency not to happen.

Based on the last two years' performance, May wasn't such a bad month for stocks. In 2008, the STI advanced by 1.4 per cent and in 2007, it was up by a whopping 4.7 per cent. The average in the last nine years, however, is -0.6 per cent.

Mr Scully thinks the buying will return in July, while the CLSA Feng Shui Index reckons it will be in August.

Mr Scully's strategy - which will position his portfolio for the next two to three years - is to allocate 80 per cent of his equities portfolio to blue chips (one stock in each sector) and 20 per cent to the massively undervalued mid-cap stocks, those which he thinks will remain solvent.