Were investors right to 'sell in May'?

ON ASSET ALLOCATION

Fans of the ‘sell in May' adage will have been cheered by the performance of equity markets last month. It was risk-off all the way, led by emerging markets which retreated by 11.2% on average.

The flight to perceived safety has continued with yields on 10 year US treasuries falling below 1.5% and lower still on German bunds. The commentator who, in 2008, coined the phrase ‘return-free risk’ to describe the prospective returns from ‘safe-haven’ government bonds clearly made the call too early, proving once again that markets can stay irrational longer than you can stay solvent. But how much further can the elastic between the fundamental valuations of bonds and equities be stretched? With no end to the euro crisis in sight the consensus view appears to be that there is little p...