Does "Sell in May and Go Away" Work?

To "Sell in May" is a fabled investment thesis. But does it actually work? Over the past 20 years, EM equities have tended to do better in the three months up to May (+2.8%, on average) than the three months after (-0.4%). We also show that May-October has been the worst rolling six months of the year for EM since 1990 (average monthly fall of 0.2%). However, while, since 1991, EM equities have risen in the three months to mid-May in 15 out of 22 years (68% of the time) they have still risen in the three months after mid-May in only 11 of 21 years (52%). So, "Sell in May" does work, but barely. Asia and EMEA have clear "Sell in May" effects; for Latin America, they are less clear.

With this in mind, investors currently fear a repeat of 2011. While YTD performance is better this year, the short-term patterns seem similar; the focus is so intense this year as "sell in May" worked so well in 2011. However, "sell in May" has failed badly in six of the past ten years in EM and has only clearly worked in three of the past 10 years (including 2011). In many recent years (2004-7, 2010) there were 'spring' corrections - remember those - which should have been bought. Average full year returns were 27% in those five years.

We've analyzed in more detail the five years when "Sell in May" worked best (1992, 1998, 2002, 2008, 2011) and when it failed most clearly (2003-2005, 2007 and 2009). Asia was the most defensive region to a "sell in May" period. The most defensive countries were generally in Asia, especially Malaysia, while the least defensive were Brazil and Turkey. Most defensive sectors: Health Care, Cons Staples, Telecoms. Most vulnerable sectors: Industrials, Materials, Energy, Utilities.

We seem less vulnerable than usual to a "sell in May" event this year. Markets have been much weaker (-8% in the past three months) than in the big "Sell in May" years (average 3-month gain of +5%). "Sell in May" usually means a US bond market rally, but can yields go any lower? We're staying positive. There are many risks - notably Europe - but China is picking up and EM equities are attractively valued.