Equities are a winter sport, says Catella’s Mårtensson

Ola Mårtensson, manager of the Catella Nordic Tiger fund, says there is evidence to suggest that Nordic equities perform best when the weather is coldest.

November offered a reasonable performance on the equity markets, with the Swedish stock exchange rising by 3.1 % and the European market by the same amount in SEK terms. The climb in the US was somewhat more modest, at 1.1 %, and in total the world index rose by 1.9 %, also in SEK terms. On the fixed income markets, “safe” government securities were unchanged over the month, while the government bonds of PIIGS countries were very strong.

Today is the coldest day so far this season. When I got up this morning it was -14 Celsius. It will almost certainly get even colder this winter, but the chart below may be some relief for a frozen soul.

Over the past 16 years, the return on the Swedish stock market, measured using the OMXSB index, has been strongest between October and April. The chart shows January as 1, February as 2 and so on. It is also apparent that the warm months of the year, May to September, have not generated any positive average returns since 1996. The old Swedish expression “Köp till sillen, sälj till kräftorna” (which encourages investors to buy in the spring and sell in the autumn) seems to have been unsuccessful in the past 16 years, but the British expression “Sell in May and go away” would have worked better. In Swedish we’d probably say that equities are a winter sport.

There is of course no scientific support for this kind of seasonal pattern, since it contradicts the efficient market hypothesis. Especially difficult to explain would be that certain months seem to have an expected return below the risk-free interest rate. This is a theoretical impossibility. But I think it is interesting nonetheless, even though the statistical base is small.

Another interesting observation is that the January effect seems to be entirely lacking throughout the period. The average return in January is negative. Historically, shares have been strong in January, especially small caps. The traditional explanation for this is that many investors sell shares at the end of December for tax reasons and prices then recover in early January. Both taxation rules and investment opportunities have changed radically in recent decades, which may explain the disappearance of these effects.

I manage the Catella Nordic Tiger fund, which invests in Nordic companies with at least 20% of their sales in emerging markets (such as China, Indonesia and Mexico). There are 65 companies that meet the criteria, with the largest being Novo Nordisk, ABB, Telenor, Maersk and Volvo. One quantitative analysis that I regularly conduct is to examine the factors that have driven returns on these 65 companies in 2012. The factors may be based on financial data such as profit growth, on market value/book value, or on statistical properties of the companies’ share price history, such as the last month’s returns or correlation to the broad market.

Most factors show no consistent relationship between the value of the factors for the companies and future returns on the corresponding shares. For example, return on equity has had no correlation with future returns on the company’s share. I interpret this to mean that the stock market has not assigned any extra premium for quality companies (high return on equity) this year.

One factor that has worked this year is the PE ratio. Companies that have a low P/E multiple, which means the share price is low relative to next year’s earnings per share, have performed much better than companies with a high P/E multiple. As if taken straight from the textbook; cheap companies are on average a better investment than expensive ones.

Another factor that has worked is historical 90-day volatility. A company with high 90-day volatility has experienced greater volatility over the last 90 trading days than a company with low 90-day volatility. In 2012, there has been a clear correlation between 90-day volatility and future returns; stocks with high volatility have performed better than stocks with low volatility. Also straight from the textbook; shares with high risk are expected to provide greater returns on average than shares with low risk.

The last factor I would like to mention is a little more unconventional; 24-month price movement. Companies that have performed well in the last 24 months have tended to continue to do well, and companies that have performed poorly in the last 24 months have tended to continue to do badly. In fact, this factor is the one that has worked best of those factors I examined. Those who prefer technical analysis over fundamental analysis also believe that this is straight out of the textbook.

Overall, the year has been an interesting investment year, with different investment styles being able to contribute to returns.


This comment was first published on www.catellafonder.se

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