May 05, 2014

    Will May-hem strike again this month?

    ONE regular occurrence in the month of May in the past four years has been sudden turbulence in global stock markets, following months of balmy trading conditions.

    Given this, the big question on many traders' minds is whether this month will prove to be the exception, or whether it will a repeat of the "Sell in May and go away" mantra made famous by writer Mark Twain?

    So far, the fund flow data seems to suggest that investors are more inclined to disregard history and load up on both bonds and stocks in their relentless pursuit to get higher yields.

    Citi Research's latest fund flow report showed an inflow of US$3.8 billion (S$4.8 billion) into bond funds and US$4.2 billion into equity funds last week.

    In particular, interest in Asian markets has been rekindled, with foreigners purchasing US$493 million in funds investing in Taiwan equities and another US$206 million in Indian equity funds. But are these investors making a wise bet, given the likelihood of increased trading volatility in May in recent years?

    The manner in which some market experts interpreted last month's United States job data - released on Friday - may shed some light on why investors are bullish on both bonds and stocks in the world's No. 1 economy, and the spillover effect this has on equity markets elsewhere.

    Last month, the US economy added 288,000 jobs - the most since 2012 and far higher than the 218,000 predicted by economists. This enabled US unemployment levels to drop to 6.3 per cent, or below the November 2009 level when Barack Obama was first elected US president.

    But market pundits noted that, despite the build-up in US employment, there is no upward pressure on wages in the US. This gives them confidence that even if the US central bank continues to cut its bond purchases, there will not be any spike in US interest rates from their current near-zero levels.

    So, after the stampede out of the debt market late last year, investors are loading up on bonds again.

    The extremely low interest rates may also prove to be a boon for the equities market, prodding investors to load up on stocks in order to enjoy a higher return on their investments.

    On the local front, the better than expected first-quarter results by DBS Group Holdings and OCBC Bank may give a fillip to the benchmark Straits Times Index (STI) as local banks get a positive re-rating from yield-hungry institutional investors.

    The STI is up 2.69 per cent from the start of the year. But, despite their impressive first-quarter profit growth, local banks have underperformed, with UOB gaining 1.51 per cent, DBS inching up 1.12 per cent and OCBC falling 4.61 per cent in the same period.

    So far, the upside this year among STI component stocks has been enjoyed by counters such as Olam International, which is up 46.41 per cent, and CapitaMalls Asia, up nearly 12 per cent due to offers made to buy out their respective minority shareholders.

    Boosted by the buoyant Jakarta stock market, which is up 13.2 per cent, Jardine Cycle & Carriage has risen almost 27 per cent, while Thai Beverage is 9.3 per cent higher, thanks to a similar boost from the Thai market's 9.45 per cent gain.

    Still, it is important not to discount the ability of this month to surprise on the downside.

    The only blip on the horizon is the escalating conflict in Ukraine, as the West casts a wary eye over Russia's next move, following its annexation of Crimea, which had belonged to Ukraine.

    This time last year, the market enjoyed balmy trading conditions until then US Fed chief Ben Bernanke rocked the market with a suggestion to scale back the US central bank's bond purchases. Investors will be watching the two appearances of his successor, Janet Yellen, before US lawmakers this week with an eagle eye.