The fifth month of the year has arrived and with that has come the requisite “Sell in May and go away” chatter.
Sell in May talk is usually bandied about by U.S. investors in reference to U.S. equities, but there is an ex-U.S. market, one easily accessed via exchange traded funds, that also merits Sell in May and go away consideration: Australia.
“May has arguably been the worst month over the last decade to hold long positions in the Australian stock market (AS51 Index); ASX 200 avg. down move during May – 2% & ~50 bps worse than any other month. In 2014, the AS51 actually closed up 0.1%,” according to Rareview Macro Founder Neil Azous.
The iShares MSCI Australia ETF (NYSEArca: EWA), the largest U.S.-listed Australia ETF, seems to be obeying the aforementioned negative seasonality for Australian stocks. The $1.68 billion EWA is off almost 1.7% over the past month, which does not sound all that bad until acknowledging the ETF has tumbled 6% since April 28. EWA has closed lower in three of four trading days this month. [Australia ETFs for the Patient Investor]
Making the bull case for EWA and Australian equities even murkier is valuation.Australian stocks are expensive, at least according to Goldman Sachs. “Finding value in the Aussie equity market has never been harder; at an average of 19x forward P/E, Industrial stocks have never been this expensive: Growth had already re-rated, but now even ‘cheap’ stocks trade at unprecedented multiples; Seeking defensives with some valuation support, we upgrade Staples to Overweight from Neutral,” said the bank in a note out last month. [Say G’Day to Australia ETFs]
In noting that the four years prior to 2014 resulted in an average May loss of 5.7% for the ASX200, Azous points out the AS51 Index trades at 17.5 times forward earnings, a 15% premium to the 20-year average.
Australian banks have been clobbered this month, increasing pressure on EWA as the ETF allocates almost 53% of its weight to the financial services sector. That is more than triple the ETF’s second-largest sector weight (15.9% to materials).
As Azous notes, pressure on Australian banks could prompt the Aussie to rally against the U.S. dollar, exactly the situation the country is hoping to avoid as highlighted by the Reserve Bank of Australia taking interest rates to a record low of 2% earlier this week.
Chart Courtesy: Neil Azous, Rareview Macro