Scrutineer: Sad September myth helps hide good opportunities

Published on Sunday 30 August 2009 22:05

STOCK market bulls and followers of the Efficient Markets Theory should take a holiday. For "Sad September" is almost upon us – the month that, for reasons that company analysts and disciples of chart analysis cannot explain – stock markets are susceptible to setback.

The first tremors of the 1929 great stock market crash occurred in September. The secondary banking crisis emerged in September. The Asian financial crisis erupted in September. Lehman Brothers crashed in September. Little wonder that for investors this is a scary month.

The UK market has fallen 21 times since September 1966, three times as often as it has fallen in April, the market's best month. According to resident Investors Chronicle guru Chris Dillow, the risk of the market suffering a significant fall – 5 per cent or more on the FT All Share index – is twice as likely as the chance of such a loss in any of the other 11 months of the year.

What is it about Sad September that makes it such a miserable month for investors? It could be that they suffer from a form of seasonal affective disorder – the drawing in of nights and the onset of cooler, wetter weather makes us more depressed and susceptible to doubt and gloom.

But we have just had a wet, damp August yet we have not gone down with August Angst – in fact, the market has stormed ahead. Nor was July all that hot, either – but there was no mass outbreak of July Jade. And what's so happy-clappy about April? Isn't it full of showers?

Perhaps I have lived in Scotland too long. Such is the perennial state of gloom – or a premonition of darker times ahead.

September tends to be a month of reckoning. For investors, September, along with January, is the most popular month for re-appraising their savings and investments. Government finance ministers, faced with the reality of billowing budget deficits, are seized with a sense of mounting panic that financial markets may not give them the benefit of the doubt until the Budget next year. Corrective action looms.

There have been 12 months since 1966 in which the FT All Share index lost more than 10 per cent. One-third of these occurred in Septembers. This September is unlikely to prove an exception. After an astonishing market rally that has lifted the FTSE 100 index some 45 per cent since the dark days of March – the biggest summer rally in a quarter of a century – some consolidation is due, if not some opportunistic profit-taking. No fewer than 118 companies within the FTSE 350 have more than doubled from 12-month lows, with ten companies more than quadrupling in value since hitting their lows. Shares in Barratt Developments have risen 479 per cent, Enterprise Inns by 420 per cent, and Travis Perkins by 290 per cent. Even Royal Bank of Scotland – that Ash Wednesday of financial shares – has risen by 385 per cent, while Taylor Wimpey has bounced by 1,026 per cent.

The concern is that markets have run ahead of events and has fully discounted the further emergence of "green shoots" well into next year. However, there is nothing guaranteed about a September correction. In the 42 Septembers between 1966 and 2008, the All Share index fell in just half of them. And according to Dillow, there's a 17.3 per cent chance of markets returning 5 per cent or more in September – better odds than in May, June and July.

What, then, should apprehensive investors do? This is a good opportunity to look critically at the broad asset allocation position and to ensure that this is in line with risk preferences and circumstances. Many investors may find that they have missed out on the rally and are still heavily invested in cash. They may wish to take advantage of a correction to start feeding more money into equity funds ahead of a more evident recovery next year and beyond. Others will want to lock in profits and take a pause before committing further funds.

Vital to both approaches is an alert assessment of the resilience of underlying investments. Company announcements need to be carefully scrutinised for warning signals such as that from Havelock Europa last week.

Others, such as Tesco, GlaxoSmithKline and Amec look more resilient to a correction. As Marcus Brooks, investment guru at wealth management group Cornelian pointed out in a well-argued presentation last week, rolling earnings recovery will work to underpin company valuations from current levels.

I continue to champion the merits of investment trusts which have been in the van of the market recovery. Broad-based trusts such as Schroder Income Growth, yielding 5.26 per cent, and F&C's British Assets Trust, yielding 5.75 per cent, look set to hold their dividends, as do Alliance Trust and Standard Life Equity Income Trust. Any correction should be seen as an opportunity to add rather than to sell.