With markets having witnessed economic weak data that reignites fears over global growth, and living with the euro zone debt crisis, investors could be forgiven for deciding to book first-quarter gains and sell in May. In 2010 and 2011, a strong first quarter of the year was followed by heavy selling. One analyst believes that will not happen again in 2012.
“The behavior of the equity markets in recent weeks, the dwindling number of positive economic surprises, the current market valuation and technical signals share striking similarities with the stock market years of 2010 and 2011,” Philipp E. Bärtschi, chairman of the investment committee at Switzerland’s Bank Sarasin, said in his monthly note to investors.
Believing investors to be more cautiously positioned as May gets underway, Bärtschi says it is unlikely that fears over the euro zone and slowing growth in China and the U.S. will mean that investors should “sell in May and go away.”
“Earnings revisions, which have returned to positive territory only recently, should support the equity markets in coming months. The first quarter 2012 reporting season indicates that cyclical sectors such as technology and consumer cyclicals have the greatest surprise potential,” he said.
The euro zone debt crisis does however remain a major concern for Bärtschi, who sees a risk that it could begin to lead sentiment.
“If the Euroland remains mired in recession until the end of the year, a fresh escalation of the euro crisis is likely,” he said. “Consequently, it will not take much to overturn what is basically a positive global economic upswing scenario.”
As a result, Bärtschi’s strategy is to take risk off the table despite his hopes for stock gains over the coming months.
“We have reduced the emerging market risk within equities and downgraded commodities from overweight to neutral,” said Bärtschi, who remains overweight stocks for the time being.
“We remain underweight in convertible bonds and overweight in gold. Since we expect the U.S. Federal Reserve to launch a new monetary expansion program before the end of the year, another gold rally could get underway in the coming months,” he said.