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Monday 09 May 2011
Telegraph.co.uk Home News Sport Finance Comment Blogs Culture Travel Lifestyle Fashion Tech Jobs Dating Offers Companies Comment Personal Finance Economics Markets Your Business Olympics Business Business Club Money Deals Ambrose Evans-Pritchard Jeff Randall Damian Reece Jeremy Warner Richard Fletcher Kamal Ahmed Alistair Osborne James QuinnTom Stevenson
The truth behind the popular markets adage of 'sell in May' Goldman Sachs' flotation marked the top of the equity bubble in 1999, while Blackstone's IPO rang the bell for private equity in 2007. Last week's sharp price falls were a reminder that the summer can be a difficult time for investors Photo: AP By Tom Stevenson 10:30PM BST 07 May 2011Follow Tom Stevenson on Twitter
Comments
No surprise then that the day after Glencore, the world's biggest commodities trader, published its prospectus the prices of oil, silver, copper, cotton and many other raw materials should have tumbled.
And what a collapse it has been. The price of tin slumped by more than 7pc last Thursday. Silver, which has soared on the coat-tails of gold, lost around a quarter of its value in a stark reminder that commodity price retreats can be scarily quick. The oil price suffered its biggest ever one-day fall in dollar terms.
There are plenty of good reasons why commodities should have paused for breath. Higher input prices are self-correcting to a degree so it should be expected that the rise in energy, metals and foodstuffs in recent months would be reflected in falling US gasoline sales, lower than expected GDP in the first quarter on both sides of the Atlantic, worse than feared jobless figures and higher oil inventories.
In the emerging world, which is the principal driver of global growth today, rising inflation has triggered a monetary tightening cycle that will inevitably hold back the developing economies. And that is starting to show up at German factory gates, where orders are lower than expected.
European Central Bank President Jean-Claude Trichet's more emollient tone on European interest rates didn't help either (although he back-pedalled a bit on Friday). A falling dollar makes commodity prices more expensive to non-Americans, so it often triggers lower prices.
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09 Apr 2011The indiscriminate nature of the price falls also points to a generalised blowing away of speculative froth. With near-record levels of optimism in commodity markets, a liquidation of a pretty overcrowded trade was on the cards.
Despite this week's gyrations, I think that the structural case for commodities remains strong. China's share of world energy consumption is expected to rise from 10pc a decade ago to 25pc in 10 years' time. We are in the middle of a fundamental shift in the balance between the supply of and demand for commodities which overshadows the more cyclical factors at play last week.
That said, the trade-off between risk and reward gets progressively less favourable the longer the upswing in commodity prices continues. There's little doubt that 2003 was a better time to be stocking up on raw materials than 2011, even if the actual top may be months or even years away.
Last week's sharp price falls were, however, a reminder that the summer can be a difficult time for investors, although not as difficult as the popular adage "sell in May and go away" might suggest. In an idle moment last week I decided to take a closer look at the numbers behind this.
I did so by tracking the performance of the FTSE 100 over the past 20 years, dividing each year into a May to September summer period and an October to April winter. Overall, Sell in May worked out to be a sensible strategy. Moving into cash during the summer and getting back into the market in the winter would have paid off over the 20-year period by a meaningful amount. A £100 investment in the UK market in 1991 would have grown to £162 for a buy and hold investor and £190 for someone following the Sell in May method.
That's the theory.
In practice I don't think many investors could have made it work. First, 10 of the 20 summers saw the market rise (by up to 18pc in the best year). Missing out on those gains would have been extremely painful and the temptation to abandon the strategy enormous. Second, the transactional costs of moving in and out of the market twice a year would have negated much of any benefits. Finally, the figures are heavily skewed by the 2000-2003 bear market, in which most of the damage happened in the summers of 2001 and 2002. Strip those out and for long periods the approach just didn't work.
Buying and selling by the season and using a giant flotation as a contrary market indicator are superficially attractive approaches, but in most cases the reality is messier than the theory. Sometimes it works and sometimes it doesn't.
tomrstevenson@fil.com
Tom Stevenson is an investment director at Fidelity International. The views are his own. Twitter@tomstevenson63.
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Follow Tom Stevenson on Twitter
Comments
No surprise then that the day after Glencore, the world's biggest commodities trader, published its prospectus the prices of oil, silver, copper, cotton and many other raw materials should have tumbled.
And what a collapse it has been. The price of tin slumped by more than 7pc last Thursday. Silver, which has soared on the coat-tails of gold, lost around a quarter of its value in a stark reminder that commodity price retreats can be scarily quick. The oil price suffered its biggest ever one-day fall in dollar terms.
There are plenty of good reasons why commodities should have paused for breath. Higher input prices are self-correcting to a degree so it should be expected that the rise in energy, metals and foodstuffs in recent months would be reflected in falling US gasoline sales, lower than expected GDP in the first quarter on both sides of the Atlantic, worse than feared jobless figures and higher oil inventories.
In the emerging world, which is the principal driver of global growth today, rising inflation has triggered a monetary tightening cycle that will inevitably hold back the developing economies. And that is starting to show up at German factory gates, where orders are lower than expected.
European Central Bank President Jean-Claude Trichet's more emollient tone on European interest rates didn't help either (although he back-pedalled a bit on Friday). A falling dollar makes commodity prices more expensive to non-Americans, so it often triggers lower prices.
What history tells us about returns over the next 30 years
Why valuations matter in US and China's tale of two economies
We’ll soon find out if superior growth in the US is justified
Chancellor must look beyond fixing the balance sheet
Japan could emerge stronger from this catastrophic quake
Eurozone's woes create opportunity for investors
The indiscriminate nature of the price falls also points to a generalised blowing away of speculative froth. With near-record levels of optimism in commodity markets, a liquidation of a pretty overcrowded trade was on the cards.
Despite this week's gyrations, I think that the structural case for commodities remains strong. China's share of world energy consumption is expected to rise from 10pc a decade ago to 25pc in 10 years' time. We are in the middle of a fundamental shift in the balance between the supply of and demand for commodities which overshadows the more cyclical factors at play last week.
That said, the trade-off between risk and reward gets progressively less favourable the longer the upswing in commodity prices continues. There's little doubt that 2003 was a better time to be stocking up on raw materials than 2011, even if the actual top may be months or even years away.
Last week's sharp price falls were, however, a reminder that the summer can be a difficult time for investors, although not as difficult as the popular adage "sell in May and go away" might suggest. In an idle moment last week I decided to take a closer look at the numbers behind this.
I did so by tracking the performance of the FTSE 100 over the past 20 years, dividing each year into a May to September summer period and an October to April winter. Overall, Sell in May worked out to be a sensible strategy. Moving into cash during the summer and getting back into the market in the winter would have paid off over the 20-year period by a meaningful amount. A £100 investment in the UK market in 1991 would have grown to £162 for a buy and hold investor and £190 for someone following the Sell in May method.
That's the theory.
In practice I don't think many investors could have made it work. First, 10 of the 20 summers saw the market rise (by up to 18pc in the best year). Missing out on those gains would have been extremely painful and the temptation to abandon the strategy enormous. Second, the transactional costs of moving in and out of the market twice a year would have negated much of any benefits. Finally, the figures are heavily skewed by the 2000-2003 bear market, in which most of the damage happened in the summers of 2001 and 2002. Strip those out and for long periods the approach just didn't work.
Buying and selling by the season and using a giant flotation as a contrary market indicator are superficially attractive approaches, but in most cases the reality is messier than the theory. Sometimes it works and sometimes it doesn't.
tomrstevenson@fil.com
Tom Stevenson is an investment director at Fidelity International. The views are his own. Twitter@tomstevenson63.
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