by Dave Mohr, Chief Investment Strategist for Old Mutual Wealth

Over the next few weeks, investors are likely to hear the old saying “sell in May and go away,” particularly since global markets have rallied so strongly over the past year (more so the past five years). The local JSE All Share Index is at record levels (in Rand terms), and so are the benchmark UK FTSE 100 (in Pounds), US S&P 500 and global MSCI World Equity indices (the latter two in US Dollar terms). In the UK, US and locally, investors are grappling with the question of whether equities are overvalued. This is not a simple exercise. Investors need to consider future company profits, behaviour of other investors, and other financial variables such as interest rates. But there is no doubt that the economic backdrop in the US and UK is favourable for equities – inflation is low, growth is picking up and central banks are in no hurry to tighten their monetary policy.

Not all markets have done well

Importantly, however, a number of key global equity indices are nowhere near record highs. European equities, as represented by the Eurostoxx 50, are still 16% below the 2008 peak as the Global Financial Crisis and then the Eurozone debt crisis wreaked havoc with investor confidence and company earnings. The Eurozone’s economy is only now exiting its double-dip recession, and company earnings are slowly improving from a depressed base.

So far this year, Japan’s equities have lost more than 12%, after surging in 2013. But Japan’s Nikkei 225 Index is still 20% and 61% below the 2008 and 1989 peaks respectively. Japan’s government is keen on its corporate sector and to spur greater ownership of Japanese equities by local investors, potentially providing support going forward.

Emerging markets, as represented by the MSCI Emerging Markets Index, are 19% below the 2007 peak in US Dollar terms, and 8% in local currency terms (taking into account that many emerging-market currencies, including the Rand, have fallen against the US Dollar). Over the past ten years emerging markets have been the star performer with their higher economic growth rates and, after the 2008 Global Financial Crisis, stronger government and corporate balance sheets. But over the past three years, emerging-market growth rates have slowed, debt levels have climbed and companies have been unable to increase profits. Old structural shortcomings like political uncertainty and reliance on foreign capital have also resurfaced.

Locally, there are also pockets of potential value as the JSE’s resources and construction indices are still below the 2008 peak. Some JSE sectors that are closely linked to the struggling local economy – such as food producers and retailers – are currently trading below 2013 peaks. The market has largely been driven by the Rand-hedge mega-cap shares such as British American Tobacco, SABMiller and Richemont. More recently, interest-rate sensitive shares, such as banks, have rallied as the market has toned down its expectations for further rate hikes.

Don’t try to time the market

Overall, some global markets have done well, but not across the board. This means there are areas offering decent value for longer-term investors. But the environment is complex and constantly shifting which is why a diversified portfolio actively managed by a professional is important. As far as “sell in May” is concerned, trying to time the market, whether by using rules-of-thumb or old sayings, is not something that should be practised. Creating wealth requires patience and is a long-term process of buying assets at a decent price, diversifying and allowing time for compound growth in order to achieve the desired returns.

Old Mutual Wealth is an advice-led, wealth management business.