16 March 2018, 16:23 GMT
“Sell in May and go away” is a common investment adage rolled out each year since average returns from the S&P are lower between May and November than the rest of the year. This often-debated saying has been examined by practitioners and academics for years with Andrade et. al. stating in 2012 that they find the strategy pervasive across financial markets, not just isolated to the S&P 500.
With this in mind, we examined credit returns over the last 20 years and found a similar pattern. The chart below shows seasonality across various credit markets throughout the year. A positive number signifies positive returns in a particular period and vice versa. Here we can see that between November and April returns tend to be positive whilst the opposite is true May to October. It confirms that “sell in May” is a valid investment strategy in credit as well.
For many fixed income managers and other investors, selling in May and waiting until the autumn to reinvest isn’t a valid or a practical option. However, these findings can help manage the credit beta of portfolios, improving the risk-adjusted returns of the credit allocation process. One major benefit of this seasonality signal is that it is uncorrelated with other market determinants such as momentum, mean reversion, sentiment or the macro environment, so when integrated into investment models, it can add value through diversification. It does work better in some markets than others, for example it is particularly successful in emerging markets but is also helpful in other assets classes including FX and inflation-linked bonds which generally exhibit a similar pattern.
The next two months are not a time in which we would normally expect a large downside correction according to our seasonality signal, but once we approach the summer the chance increases. We will be keeping a close eye on this and our other signals in the coming months as we try to decipher when the next correction will occur.
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