Some commentators believe we are now approaching a worrying part of the stock market cycle. Two issues are worth thinking about.
Bear Market: Fresh evidence hints we may either be at the early stage of a new bear market downturn or close to the start of one.
Sell In May: The beginning of May is often start of a money-losing part of the year for UK investors.
Do not take either of these issues as guarantees for the next few months. A number of City observers with solid reputations disagree on one or both counts. Even so, if current stock market conditions worry you personally, it might be the right moment to consider investing in the electricity sector.
UK electricity companies are products of the privatisation wave of the early 1990s. Stock market professionals have been monitoring them via the FTSE-Electicity sector index since 1992. Despite the fact that the sector is a "babe in arms" in historical terms, some interesting trends are already becoming apparent.
History shows that electricity shares are a better-than-average place to invest in during bear markets. There is nothing like solid dividend protection and a proven resistance to falling revenues to support share prices during worrying times.
The UK stock market suffered four bear markets since 1992. As our table shows, sector shares did better than the broad market in three out of four downturns.
1994 was an exception but even here, the loss was only slightly greater than for the broad stock market index.
|
Bear Market Date |
FTSE- Electricity Sector |
FTSE-All Shares Index |
|
|
|
|
|
May 1992 to Aug 1992 |
+6% |
-18% |
|
Feb 1994 to June 1994 |
-21% |
-18% |
|
July 1998 to Oct 1998 |
-1% |
-25% |
|
Jan 2000 to March 2003 |
-17% |
-51% |
|
|
|
|
The second worrying issue is the old saw advising investors to Sell In May. There have been many exceptions to the rule in recent years so there can be no guarantees for any single year. But like it or not, weakness often strikes the UK stock market as summertime approaches.
History teaches that the electricity sector does better than average during summer months. Since 1992, it out-performed the FTSE-All Shares index in 11 out of 13 tries from May to August. Sector shares either rose by more than the All Shares in up years or fell by less in down years. The average annual sector gain for this four-month stretch was a bit over five per cent. The All Shares index fell by one per cent per year, on average, during this same period.
Even better, most losing years for electricity shares featured small losses of just one or two per cent during these four summer months.
It is worth noting that sector shares have been galloping ahead in recent months. Prices advanced by eight per cent since the start of the year. The broad stock market was little changed during this same period. It appears that conservative investors are already moving into this sector for protection against possible market weakness in the near future.
