Sell in May and Go Away?

Should investors be looking to sell up and find a safe haven over the summer months as the wall of worry finally gains traction? Philipp E. Bärtschi, the chief strategist at Sarasin in Zurich, believes it is probably time to take some risk off the table.

One euro and U.S. dollar
One euro and U.S. dollar

“The stock market air is likely to get thinner and thinner and the risk of a consolidation will increase,” Bärtschi said in a research note.

Timing your exit will be crucial according to Bärtschi, who sees two factors that could drive further gains in the short-term.

“The positive surprises of the Q1 2011 reporting season could still provide some short-term impetus. The growing number of merger and acquisition transactions, as well as the reasonable stock market valuation, should give equities further support,” Bärtschi wrote.

“Driven by positive quarterly figures, many equity indices scaled new cyclical highs in April. But at the same time, there are lingering concerns about the consequences of the mounting public debt burden,” he added.

With talk of Greek restructuring rife and S&P downgrading its outlook for US debt, Bärtschi is unsure whether the euro or the dollar will be the worst performer over the coming months.

“Since the US economy has received and continues to receive the greatest monetary and fiscal policy stimulus, the US dollar has suffered accordingly,” he wrote.

Talk of European Central Bank rate rises to curb inflation have boosted the euro versus the dollar but Bärtschi believes the ECB may not hike as aggressively as the market is expecting.

“There is some doubt as to whether the ECB will undertake the interest rate hikes expected by the market because the European economy is likely to weaken significantly in the second half of the year,” he wrote.

“Hence, the euro, which is clearly overvalued against the US dollar at the moment, could replace the US dollar in the coming quarters as the weakest currency,” Bärtschi added.

“The friendly conditions for risky assets are likely to continue in the short term.

However, the headwind for risky assets should pick up in the coming months, due to the impending economic reversal,” he also said.