In the investing world there are numerous sayings that may or may not be true, with perhaps the most famous being “sell in May and don’t come back until St Leger’s day”. In other words, sell up in May following a rally in the earlier part of the year. That’s because news flow can be somewhat lacking in the summer and the index can sometimes drift lower. However, in September (which is when St Leger’s day occurs), news flow picks up and a rally could ensue (or so the theory goes).
Whether this saying is correct or not, this year it may not hold true. That’s because unlike in previous years, the period after May could prove to be anything but quiet on the news flow front. In fact, it could be one of the most exciting and eagerly anticipated periods of British history in decades. Of course, the reason for that is the EU referendum that will take place on 23 June, with it having the potential to hugely impact share prices over the summer.
If Britain remains in the EU, the likelihood is that shares will rally. That’s because the FTSE 100 most likely includes a discount of some degree where investors are pricing-in the risk of leaving the EU and the uncertainty that it would bring in the short run. If this does take place then there could be an opportunity for investors to buy-in ahead of what could prove to be a very profitable summer, with a major risk facing the British economy in the short run suddenly gone.
Investor concern
Clearly, if Britain leaves the EU then it’s likely to cause considerable concern among investors due to the uncertainty that the country will face in the months following the decision. As with a rally, a fall in share prices can create opportunities to buy high quality companies at discounts to their intrinsic values. This is particularly the case with international stocks that may do very little or no business in Britain and are therefore likely to see their profitability largely unaffected by the decision regarding leaving the EU.
Of course, the above isn’t meant to summarise whether leaving the EU is a good or a bad thing for Britain in the long term. It could perform better outside or inside the EU: we simply don’t know since nobody can accurately predict the future. However, what can be said with some certainty is that a lot of investors are likely to delay their holidays until later on in the summer so they can be around to see and react to what’s undoubtedly a hugely significant event for the FTSE 100.
Selling in May and going away may work in other years, but in 2016 an investor following that advice may return to a very different investment landscape come the start of September.