There is an old saying referring to the stock market over the summer "Sell in May and go away . . . and don't come back until St Leger Day".

The phrase was coined in the days when the stock market activity was dominated by rich individual traders, many of whom had bought a seat on the Exchange. They, quite normally in those days, spent much of the time between May and September holidaying or going to all the social engagements, such as Henley, Wimbledon and the big horse races.

The St Leger is the last of the five classic races to be run during the season, in September, and is also the oldest classic race, not just in the UK but in the world. The St Leger started in 1776 after being created by an Irish soldier, Lieutenant Colonel Anthony St Leger, who later became governor of St Lucia. The race started as a sweepstake for three-year-old horses and was first won by Allabaculia.

Analysis of the adage shows that it is numerically wrong. Since 1965, it would have been right to sell in May 18 times, wrong to do so 22 times, with two years offering no change. In more recent times, the past four years have seen the market higher three times, with last year showing a marginal application of the adage.

The stock market has recovered strongly, rising by more than nine per cent since the setback in February and March. This is due to a continuation of companies producing more-than-satisfactory results. Another factor is takeover rumour or reality. On both grounds, it would appear that valuations remain attractive.

As takeovers generally rely upon borrowing, or leverage by the aggressor, an environment of low interest rates is required. This enables the cost of borrowing to be more than outweighed by the rate of return available from the target company.

The summer months, depending on when you view the summer starting, are likely to see higher interest rates, leading to higher borrowing costs.

The Bank of England's monetary policy committee meets this week for its monthly meeting, with a decision on May interest rates due at noon tomorrow. An increase is nailed on, and it is just a matter of whether the rise will be a quarter point or half. Most economists are forecasting only a quarter, but are not ruling out a subsequent increase later in the year.

An increase, the first since January, to 5.5 per cent could well be taken in its stride by the stock market, as this would only be according to expectations. If rates were increased to 5.75 per cent, this could well send shock waves around the market. The worry then would be at what level does the Bank of England judge to be stable rates for the economy?

Clearly, as stated before, higher interest rates lead to higher borrowing costs, which can only lead to a squeeze on profit margins. Rising share prices are reliant on company earnings rising and the ability to distribute those earnings as increased dividends to shareholders.

There is now a two-way pull, between those who believe that share prices are still undervalued, otherwise takeovers would not happen, and those who believe the old adage to be appropriate this year.