World Market Summary
In May, generally weaker data on US economic growth and inflation enabled financial markets in the west to bounce back strongly from the April sell off, with Nasdaq leading the way. We are now in a period where ‘bad’ (i.e. soft) economic news is good news for markets as it enhances the prospects for interest rate cuts. Employment numbers, retail sales, existing home sales and manufacturing Purchasing Manufacturing Index’s (PMI) were all below expectations in the US, as were both the generally used Consumer Price Index (CPI) and the Federal Reserve’s (Fed) more arcane but preferred measure called the Personal Consumption Expenditures Price Index (PCE).
The weakness in the above numbers enabled US bond yields to fall by more than in other developed countries and this in turn led to dollar weakness. Indeed although gilt (UK bond) yields fell a little they actually rose in both Germany and Japan over the month as economic data was slightly stronger relative to expectations. Sterling and the euro showed particular strength, although the yen ended marginally weaker, despite a narrowing of the bond yield differential.
The UK had stronger Gross Domestic Product (GDP) growth than anticipated in Q1, witnessed a big improvement in the Confederation of British Industry (CBI) Monthly Trade Balance and enjoyed a further pickup in consumer confidence. Service inflation and wages remained sticky whilst poor weather held back retail sales.
Chinese economic numbers were somewhat lacklustre in May with broad credit expanding at the lowest rate in decades. However, the government has taken significant steps to bolster the ailing property market and this should facilitate a re-acceleration in GDP from here.
Within markets, technology was helped by another set of stellar results from AI (Artificial Intelligence) lynchpin Nvidia which overwhelmed poor market reaction to results of other large tech stocks such as Dell and Salesforce.Com.
In the UK, the market was more cyclical with banks and house builders performing well. Investors seem to have taken news of an early General Election in their stride whilst the conviction of presidential candidate Trump has not unduly concerned markets in the US.
The oil price weakened over concerns about demand in light of the economic data from the US and China. Fears over supply also surfaced as the Organisation of the Petroleum Exporting Countries (OPEC+) meeting approached and investors were wary of production increases being agreed.
Despite weakness in oil, both copper and especially gold managed to deliver positive returns.
In the summer months, financial market volatility is usually higher than average and we must be aware of that. However, several economies, such as the UK, Europe and China, are emerging from sub-trend growth, and valuations remain attractive relative to history, particularly for small-cap stocks. As interest rate fears abate, we remain confident in the medium term outlook for equities and bonds alike.
Our in-depth views on:
Our weightings are based on sterling as a base currency.
United Kingdom
UK equity markets enjoyed a stellar May with the FTSE 100 rising 2.08% and the more domestic focused FTSE 250 enjoying a gain of 4.19%. Improving momentum in the economy, forecasts of rate cuts on the near horizon, an improving property market and inflation moving towards the Bank of England (BoE) target level lifted sentiment with the FTSE 100 hitting all-time highs mid-month.
The UK economy grew at its fastest level in two years, surpassing forecasts for the first quarter growing at 0.6% and confirming the country is out of the technical recession seen in late 2023. The growth was led by the strength in the services sector with construction remaining weak. In a further boost the International Monetary Fund upgraded UK growth prospects for 2024.
Inflation fell to its lowest level in nearly three years in April slowing to 2.3%, slightly higher than expected but down from 3.2% in March. The drop was attributed to falling energy and food prices as well as tobacco products. Services inflation, one of the key drivers of BoE policy, cooled to 5.9% from 6% but remained above the central bank forecasts.
In a surprise, UK retail sales fell sharply dipping 2.3% in April vs the anticipated 0.4%. Poor weather with significantly above average rainfall put off shoppers during the month. Encouragingly, however, consumer confidence continued to improve with easing inflation and potential rate cuts boosting spirit. There was also better news in the housing market with average prices edging up 0.4% between April and May according to Nationwide, underlining the resilience in the sector.
United States (US)
The US was the star of the show in developed markets with the Nasdaq up 6.39% and the S&P 500 up 4.96%. The rally was not just confined to the large-caps as mid and small-caps also enjoyed a handsome rally, with the Russell 2000 up just under 5%. This came on the back of weaker economic data as bad news in the economy is now being seen as good news for equity markets, as mentioned above. Strong quarterly results from Nvidia also fuelled the rally with the company reporting huge beats on both revenue and net income as they continue to benefit from the buildout in Artificial Intelligence (AI). Interestingly, anything AI related in the tech sector not called Nvidia sold-off in the last few days of the month as the market appears to be beginning to come to terms with the amount of spending that will actually be received by individual companies. Utility stocks did continue their strong run as elevated future electricity demand required for AI data centres continues to permeate investor minds.
As mentioned above, we have continued to see a deceleration in the US economy as a number of economic data points came in lower-than-expected in the month. We, and most economists, expect the US to slow this year as all of the UK, Europe and China accelerate.
Elsewhere in the US, Republican candidate Donald Trump became the first former President in History to be found guilty of committing a crime. The former President was found guilty of 34 counts of falsifying records, however he does intend to appeal. Meanwhile, his opponent President Biden, increased tariffs on Chinese electric vehicles in the month. This will likely have a very minor impact on these companies profitability and is more about gesturing and attaining political goodwill.
Europe
The European market had a strong month, delivering a total return of 3.7%. This performance was driven by Spain’s 4.4% return but tempered by France’s 1.41% return. The market rallied on expectations of a rate cut at the upcoming ECB meeting on 6 June 2024, despite a higher-than-expected inflation print as a result of higher energy prices.
On this inflation data, whilst negotiated wage growth unexpectedly accelerated to 4.7% in Q1, forward wage agreements have been moderating and the Q1 number was skewed by lagged German wage increases. As a result, as wages moderate in the coming months we would expect inflation to continue to ease.
Moving on to the economy, we are continuing to see encouraging signs of improvement and economic surprises (data coming in better-than-expected) are picking up. The Eurozone’s GDP grew by 0.4% in Q1 which was much higher than expected while manufacturing is continuing to stabilise. Retail sales and industrial production were also both stronger-than-expected. We would expect the economy to continue to improve over the remainder of the year especially if we start to see interest rates cuts from the European Central Bank (ECB).
Asia and Emerging Markets
Weak credit and consumer spending data contributed to the subdued performance of onshore Chinese shares. Sentiment was further impacted by President Biden’s decision to impose tariffs on an additional $18 billion worth of imports. Chinese authorities continued efforts to shore up the property sector have been significantly bolstered by Beijing’s plan to finance regional government buying of unsold homes. This could be a key factor in improving consumer sentiment if it succeeds. Despite onshore weakness, Hong Kong provided decent positive returns whilst Taiwan rose strongly over the period as exemplified by semiconductor behemoth Taiwan Semiconductor Manufacturing Company Limited (TSMC).
The Indian market ended slightly lower as general election results are anticipated whilst Korean equities fell with Samsung continuing to lag its semiconductor peers, as it has done all year.
Japanese shares were very subdued as some investors are fretting that the Bank of Japan is running out of time to act to raise interest rates. Such will help repatriate money back into yen assets and therefore bolster the hitherto weak currency.
On the economic release front, Japanese core cash wage growth and PMI’s gave grounds for optimism but consumer confidence fell for the second month in a row, trailing expectations.
If the yen does rally, some investment teams, such as Jupiter Japan Income, expect market leadership to move away from multinational value stocks and into small and mid-cap companies focussed more on the domestic Japanese economy.
Fixed Income
Bond markets provided disparate returns in May as inflation and economic data releases varied across regions. In sterling markets, the Investment Association High Yield Market outperformed the IA Sterling Corporate Bond sector which in turn outperformed the IA Government Gilt sector. Within the government sector, index linked bonds outperformed conventional gilts.
The US saw the biggest fall in bond yields whilst the positive returns in the UK were more muted. Japan and Germany saw yields actually rise.
As mentioned in the overview, US returns were enabled by both economic activity and inflation data coming in below expectations.
There has been a big change in the expectations of bond investors year-to-date. At the end of last year, up to six interest rate cuts were expected in the US. Now, it is two at the most, and on some days the market has almost given up on rate cuts. Investors have also pushed back when they think policy makers will commence the interest rate cuts, especially for the US. The original prospects for a May cut have now gone but the UK and ECB are expected to act in June whilst Q3 is the expected timeframe for America.
We stick to our expectations of two cuts by each of the Fed, ECB and BoE before year-end.
Alternatives
Gold was up modestly in what proved to be quite a volatile month for the precious metal. Gold experienced strong buying momentum in the middle of the month on the back of a weakening dollar and enduring demand in Asia, to the extent that on 20 May, gold set a new intraday all time high reaching $2,400 per ounce. Gold prices finished the month around $2,330 per ounce after some consolidation as gold markets continue to assess US inflation data and the timing of the Fed’s easing of monetary policy. Notably, silver had even more stellar month, up double digits in May.
As mentioned above, oil prices weakened over concerns about demand in light of the economic data from the US and China. Fears over supply also surfaced as the OPEC+ meeting approached and due to concerns that the members may increase the supply of oil.
Property
Home prices have now risen for the fourth straight month in the UK, supported by strong wage gains and lower inflation. The Nationwide House Price index rose by 1.3% year-on-year in May, a noteworthy acceleration from 0.6% in the period prior. The rise comes amid signs of resilience despite the enduring affordability pressures that are tied to elevated longer term interest rates. Notably, people in the UK borrowed approximately £2.4 billion of mortgage debt in April which is the most since November 2022, a considerable increase from the rise in March 2023.
The EU concluded the quarter with better-than-expected GDP expansion, up 0.4% year-over-year and 0.3% quarter-over-quarter. Business activity surged at its fastest pace in nearly a year in April, driven by a recovery in the services industry, and consumer confidence rose to its highest level since February 2022. However, the path to manufacturing recovery remains bumpy, with the manufacturing PMI falling to 45.7 from the 46.1 reading in March.
Germany, Europe’s largest economy, entered a technical recession, with the economy shrinking for the second consecutive quarter by 0.2% year-over-year. Nevertheless, we believe the downturn may be bottoming out, with a recovery on the horizon particularly as manufacturing has now started to turn. Overall, business sentiment improved for a third consecutive month, a pattern often signalling an economic turning point, and the government raised its growth forecast for this year to 0.3% from 0.2%. A solid rise in services activity drove Germany’s private sector unexpectedly back to growth in April, while the decline in manufacturing began to ease, with the April manufacturing PMI rising to 42.2.
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Important Information
All Index data figures are sourced by Morningstar and correct as at 31 May 2024, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.