Hong Kong stock exchange. Photo: Wikimedia Commons
Hong Kong stock exchange. Photo: Wikimedia Commons

Investors may be tempted to take profits, or “sell in May and go away,” after the best first quarter in Hong Kong’s benchmark stock index since 2012, but the old trading adage has come up short recently in the local market.

Citibank Wealth Management said the annualized return of a “Sell in May strategy” was 1.9% from 2000-2016 versus 5% for the benchmark Hang Seng Index. The strategy assumes investors sell on the final trading session in April and stay out of the market until November.

Investors following this strategy would have missed out on gains in 11 of the past 17 May-October periods, including four in the past five. Since 2000, the Hang Seng Index rose as much as 54.3% during the six-month interval in 2007 and fell as much as 45.8% in the following year.

Citi analysts wrote in a note dated April 3: “Conclusion: Stay invested could be a better strategy.”

The rest of the region has not fared as well during recent May-October periods, however. Japan’s Nikkei 225 only managed gains during that time in six of the past 17 years, declining an annualized 3.6%. The Shanghai Composite Index dropped 1.9% per year on average over that span and Taiwan’s benchmark fell 3.8%.

Investors will enter the year’s middle period on the back of a first-quarter rally in equity markets around the region. If Asian benchmarks continue to trend up, particularly those that historically underperform in May-October, it could be a telling litmus test that the resurgence in regional stocks is just getting started.

Hong Kong’s Hang Seng Index climbed 9.6% in the first quarter this year. Markets around the region set the pace during that time with the MSCI AC Asia Pacific increasing 9.5%, topping gains of 6.2% in the MSCI USA and 7.4% in the MSCI AC Europe.

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Investors in Asian stocks will be weighing several upcoming economic indicators and central bank decisions when deciding whether or not to bet on this year’s rally continuing.

Japan is scheduled to announce its preliminary first quarter GDP data on May 18. Expectation has been building for signs of a sustained recovery in Asia’s second largest economy after the International Monetary Fund raised its 2017 growth forecast from 0.8% to 1.2% in an April report, citing improvements in trade conditions. Japan also announced better-than-expected exports in March.

Around the region, Indonesia is expected to announce in May its first quarter GDP growth rate as well. China’s latest monthly manufacturing data will also garner headlines as market watchers look to see whether economic growth is still on track after the Purchasing Manager’s Index climbed in March to its highest level in nearly five years.

Watch the greenback

Another date to circle will be May 3, when the US central bank’s monetary policy setting committee concludes its next scheduled meeting. As of April 24, the CME Group forecast a 94.7% chance that the country’s key interest rate would remain unchanged.

A moderate policy outlook could spell further weakness for the US currency. The Bloomberg Dollar Spot Index, which measures the greenback against a basket of other currencies, traded down around 4.6% on April 24 from a 14-year intraday high hit in January.

A slumping US dollar could make Macau gaming stocks and Hong Kong’s flagship air carrier Cathay Pacific more attractive since they service regional customers and price their offerings in currencies tied to the greenback.

By the same token, however, it could spell further trouble for Japan’s automakers because they would lose money when converting proceeds from sales in North America back to the yen. Through April 24, Toyota Motor Corp. is down 14.4% so far this year and Honda Motor Co. has dropped 7.3%.

Further unwinding in the currency could also have broader implications for increased trading activity throughout the region as investors look for new markets to invest in after selling off US dollar-denominated assets.

US-based funds that buy international stocks raised US$5.8 billion in the week ended April 12 versus a US$2.7 billion sell-off in funds focused on the domestic market, according to Investment Company Institute data. The international funds have attracted more than US$50 billion so far this year, the most since 2015.

“Don’t land yourself on a landmine that you don’t know about because there are a lot of booby traps out there”

This has translated to higher trading interest in Hong Kong as daily average turnover topped HK$80 billion in both February and March before breaching the HK$100 billion mark on April 5.

Turnover tallied just HK$61.1 billion on April 21, however, as investors grew cautious ahead of a contentious presidential election in France and an expected announcement from US President Donald Trump regarding his much-anticipated tax plan.

“For the coming couple of months you have to have a wait-and-see attitude,” said Louis Tse, a managing director at VC Asset Management. “Don’t land yourself on a landmine that you don’t know about because there are a lot of booby traps out there.”

Meanwhile, mainland stocks stand to benefit from a liquidity boost if MSCI includes A-shares in its Emerging Markets Index. The index provider may announce in June the results of a proposal to add 169 A-shares, which would require investors tracking the benchmark to add the stocks to their portfolios. A-shares would initially combine to just a 0.5% index weighting under the plan, however, so the impact may be mostly sentiment-driven at first.