However the advice from The Telegraph today as Quester Editor John Ficenic is that this summer you should sell in May as Brexit risk looms and the credit cycle turns.
The old adage goes that investors should “Sell in May and go away; don’t come back till St Ledger’s Day” to avoid the turbulent summer trading when volumes are low and negative news can result in a wild moves.
This year should be an absolute corker because just as bankers head for the beach, the UK will go to the polls to decide whether to stay in Europe. The International Monetary Fund has said a vote to leave could pose a threat to the global economy.
The FTSE 100 has struggled to make any headway this year inching ahead just 1pc, and is still down 10pc from an all-time high of 7,104 last year.
The “price to earnings ratio” or P/E – a popular way of measuring relative valuation in stock markets – now stands at 17 times. The long run average P/E for the FTSE 100 is 15. So, shares are already looking expensive and don’t price in the risk.
Credit cycle turns
Record low interest rates have allowed companies to drive growth through takeover activity. Cheap debt has also been used to artificially manipulate higher earnings per share, by funding share buybacks.
The Deutsche Bank annual credit default study raises fears that we are now late in the credit cycle. The debt experts think the cycle is already turning in the US and they continue to expect a full default cycle towards the end of 2017, a situation that could be made far worse if the US slips into recession.
When the cost of debts begins to rise it rapidly eats into the equity value, and the current FTSE 100 PE ratio of 17 certainly doesn’t price this in adequately.
Dividend warning
Another argument for the cheapness of shares is related to the dividends they pay to investors. The dividend yield on the FTSE 100 is currently about 4.4pc, and putting that in context the UK 10-year gilt is offering a return of 1.8pc.
In a world of rational investors it should be buying equities and selling low-return investments such as government debt.
The FTSE 100 dividend yield of 4.4pc is looking increasingly exposed to cuts as dividend cover falls and earnings for banks, energy firms and retailers come under pressure. Eight FTSE 100 companies have already slashed dividends during the past 12 months.
Sell in May
The UK equity market is looking overvalued on both an earnings and yield basis. The economic recovery is looking long in the tooth and the credit cycle is beginning to turn in the world’s largest economy. Throw in the Brexit vote and cash is king this summer.
