Seasonality in market performance: is it ‘a thing’?

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Markets are funny. They can make you a lot of money and they can lose it for you too. Seasonality is particularly funny. Investors look to come up with reasons to try to make some sense out of it. Take emerging markets as an example.

According to Alastair Reynolds, portfolio manager for emerging markets at Martin Currie Investments, the first half of the year is usually better for emerging markets than the second half. Also, he says, and given that he has a lot of experience doing client presentations, he has found that clients tend to be more receptive in the first half of the year. Note to BDMs: get cracking in the first half of the year.

On a recent visit to Australia, Reynolds focused, in his discussions with super funds and consultants, on China. It’s the biggest of the emerging markets and it is also the most volatile. He says that there is “definitely a link with the calendar year”. Martin Currie’s Reynolds says the portfolio managers look at China as one of the more volatile of the emerging markets, and it’s also the biggest. “China tends to go in those swings of negative one year and positive the next year. Yet it’s as much about over reaction to news flow as it is any other behavioural trait,” he says. “There’s definitely a link with the calendar year though, which doesn’t make any sense.”

But that doesn’t mean that seasonality directs how you perform. In fact, investors can do well by positioning against the seasonality.

“It goes in swings and roundabouts,” Reynolds says. “There’s a broader behavioural trait going on. There’s also the saying: ‘sell in May and go away’, which has some truth to it although you’d imagine that by now it would have been arbitraged away.”

Paul Sloane, also an emerging markets portfolio manager at Martin Currie, adds that, as is particularly popular in the US, managers and other investors will often redraw their annual predictions in the first quarter of the calendar year.

But the old ‘May’ adage may well hold true in 2019 if Trump has any say on it. We are barely one week into May and with no firm commitments yet from the Sino-US trade talks, Trump has threatened a ramp up in the value of goods he is willing to target with a 25 per cent tariff.

Axioma a global research firm which specialises in risk, last month published a paper, using the firm’s risk metrics to assess comparative investor sentiment for risk-on and risk-off, which it calls its ‘ROOF Indicator’. It was written by Olivier d’Assier, the head of applied research for APAC.

Observations over the past 10 years for the differences between buying in January to April and the rest of the year include a number of highlights.

  • With the exception of Asia ex-Japan, investors seem to start the year being very risk-tolerant, and, with the exception of Japan, end the year being very risk-averse.
  • Since January 2010, investors in Japan seem to be permanently risk-tolerant.
  • Emerging market investors are more risk-averse, more of the time, than any other (i.e., three out of four quarters).
  • Investors in Australia and emerging markets appear to experience the most anguish during the second quarter.
  • Investors in China seem to get progressively more risk-averse as the year progresses.

The paper adds that October seems to be a “flashpoint” for US investors and, by association the global developed markets, but only moderately for Europe and Asia ex-Japan. December seems to bring considerable risk aversion in Australia, China and global emerging markets.

Paul Sloane points out that interest rates were rising all last year, but the team now think they won’t raise rates in 2019. “We’ve had a tidal wave of interest rate cuts in emerging markets countries. We should see more economic activity in the emerging markets. There has been a significant change in the wind since late last year.”

Martin Currie likes to enter into a partnership with its client investors to take a 20-year view, which means they should not be fazed by short-term seasonal influences.

Kimon Kouryialas, the firm’s head of Pan Asia distribution, says: “We want to align ourselves over the long-term with our clients. They are starting to make it clear this is what they want as well. It’s a differentiator.”

NOTE: Martin Currie is a sponsor of Investor Strategy News.

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