Category: Monthly Market Review

A look back at markets in April, which saw a shift in interest rate expectations with markets now expecting faster rate rises.

The month in summary:

Equity markets saw further falls in April. Global shares were hit by the ongoing war in Ukraine, lockdowns in China, continued supply chain disruptions, and expectations that US interest rates could rise swiftly. US shares were sharply lower after disappointing updates from some previously fast-growing companies. Bond yields continued to rise (meaning prices moved lower) as markets anticipated significant interest rate hikes.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities fell sharply in April. Economic data showed signs of weakening while inflationary pressures continued to prompt the Federal Reserve (Fed) into a more aggressive path of interest rate hikes. Several high-profile US tech firms were notably weaker on supply-chain concerns and lacklustre results.

Inflation – as measured by headline CPI – increased 1.2% over the month of March, a sharp pick-up from February. This took the annual rate of inflation to 8.5% from 7.9%, its highest since December 1981. Higher fuel prices contributed significantly to the elevated number.

The Fed signalled a 50 basis point hike would take place in May in a step up in the central bank’s inflationary countermeasures. Meanwhile, industrial activity was broadly weaker, consumer confidence down, and initial data showed a contraction of GDP in Q1.

Weakness was widespread. Consumer staples were more resilient, while most other sectors declined. Consumer discretionary companies, unsurprisingly given the damage to consumer confidence, were amongst the weakest over the month. Car manufacturers were especially hard-hit. Communication services also declined. Netflix, notably, fell sharply after its net loss of subscribers in Q1, the first quarterly decline in users since 2007.  

Eurozone

April saw further declines for eurozone equities as the war in Ukraine continued and there was no let up in inflationary pressures. Annual eurozone inflation reached 7.5% in April, up from 7.4% in March. Russia halted gas supplies to Poland and Bulgaria after the two countries refused to comply with a decree from Russia that payment must be made in roubles.

The best performing sectors included energy, amid ongoing strong demand, and communication services, where telecoms stocks fared well given their defensive profile. Information technology, consumer discretionary and industrials were the weakest sectors. Companies in these sectors tend to be among the most affected by supply chain disruptions and concerns over consumer confidence.  

The eurozone economy grew by 0.2% quarter-on-quarter on Q1 and the unemployment rate dipped in February to 6.8%, from 6.9% in January. Forward-looking indicators painted a mixed picture: the services purchasing managers index (PMI) hit an eight-month high amid an upturn in tourism, but manufacturing PMI reached a 22-month low. (The PMI indices, produced by IHS Markit, are based on survey data from companies in the manufacturing and services sectors.)

As expected, Emmanuel Macron won the French presidential election.

UK

April was another marginally positive month for UK equities. The FTSE 100 index remains one of the few key national benchmarks in positive territory for 2022 in the year to date (local currency terms).

Typically defensive groups provided most of the impetus for the market, notably the pharmaceutical and the consumer staple sectors. Many of these companies are also big dollar earners and received additional support from the strength of the US currency, especially versus a weak sterling. Dollar strength also benefited the energy companies while utilities were in demand given their expected resilience to stagflation, being the combination of slowing growth and accelerating inflation.  

Sterling performed poorly amid fears around the domestic economic outlook. Official data showed the UK economy slowed more sharply than expected in February, when monthly GDP rose by 0.1%, from 0.8% in January. Meanwhile, the annual rate of UK consumer inflation climbed to 7.0% in March from 6.2% in February (consumer price index), its highest since March 1992.

The same fears around the domestic outlook also weighed on domestically focused sectors and UK small and mid-cap equities underperformed as a result. Consumer-facing companies in particular struggled in the face of cost of living concerns, which have raised questions around the ability of some companies to pass on their own rising costs.

Japan

After initial weakness, the Japanese stock market drifted sideways to end April 2.4% lower. The yen again weakened sharply against the US dollar in April, breaching the 130 level for the first time in 20 years.

Aside from the ongoing human tragedy unfolding in Ukraine, Japan’s equity market in April was primarily driven by news flow on monetary policy and currency markets. Comments from the US Federal Reserve pointed to a widening interest rate differential with Japan materialising earlier than expected. This view was reinforced by the results of the Bank of Japan’s (BoJ) own policy meeting on 18 April, confirming no change in policy and the maintenance of the existing target of ⁺/_– 25bps for the 10-year bond yield.

However, there was some surprise in the degree of commitment to this target shown by BoJ Governor Kuroda. Until the last two months these operations had been extremely rare, and generally only deployed at specific moments of significant market stress. However, Mr Kuroda stated that these fixed-rate operations will be conducted every day throughout May, virtually guaranteeing no rise in bond yields, which quickly pushed the yen down though the psychological 130 level against the US dollar.

On the corporate front, corporate results announcements began in late April for the fiscal year ended in March. The bulk of companies, however, will report in May, after the Golden Week holiday period.

Asia (ex Japan)

Asia ex Japan equities were lower in April as China struggled to contain its worst outbreak of Covid-19. This prompted fears that the subsequent economic stoppages could have a wider impact on the global economy and exacerbate the global supply chain shortages. Shanghai, China’s largest city and home to almost 25 million people, has been in lockdown since the end of March when cases of the Omicron variant started spiking.

Expectations of higher interest rates and the ongoing Russian invasion of Ukraine also weakened investor sentiment during a volatile trading month.

Taiwan was the worst-performing index market during April, with major electronics manufacturers and chip makers slumping due to supply chain disruptions amid the lockdowns in Shanghai and neighbouring cities. Share prices were also sharply lower in the Philippines, South Korea and Singapore in April, while share price declines in China and Hong Kong were less muted.

Indonesia was the only market in the index to end the month in positive territory after ratings agency S&P upgraded the country’s outlook to stable from negative, citing the improvement in Indonesia’s fiscal position.

Emerging markets

Emerging market (EM) equities were firmly down in April, amid a pick-up in risk aversion globally. Increasingly hawkish sentiment from the US Federal Reserve, US dollar strength, concern over the impact of Covid lockdowns in China, and Russia’s ongoing war in Ukraine all weighed on the outlook. Poland, which saw its gas supply from Russia cut off, was the weakest market in the index, while neighbouring Hungary also lagged.

Industrial metals sold off amid increased uncertainty over the demand outlook from China, which was negative for net exporters Peru, Brazil and South Arica. In Peru, protests in response to soaring food and energy inflation, also weighed on the outlook. Mexico underperformed as the cyclical outlook deteriorated and policy concerns returned, while a weaker outlook for global trade was negative for Taiwan and South Korea.

By contrast, Turkey generated a positive return and was the best-performing index market. Net energy exporters Saudi Arabia, Qatar and Kuwait also finished in positive territory. China outperformed but posted a negative return as concern over the growth outlook increased and lockdowns implied supply chain disruption may be prolonged. This was despite some modest monetary easing during the month.

Global Bonds 

Bond yields continued to rise in April, resulting in further negative returns (yields and prices move in opposite directions), amid continued high inflation and expectations of significant interest rate hikes.

Investors continued to weigh up the uncertainty of the war in Ukraine and the resulting disruption to supply chains. Concerns over the global growth outlook have begun to mount too, with China maintaining stringent lockdowns to tackle Covid-19. 

US consumer price inflation accelerated to 8.5% year-on-year in March though the core personal consumption expenditure index fell marginally to an annualised 5.2%, from 5.3%.

The Fed maintained a hawkish stance. Policy minutes indicated it is considering a relatively quick reduction in its balance sheet. Later in the month, Fed Chair Jay Powell signalled a potential 0.5% rate increase in May.

The US 10-year Treasury yield increased from 2.35% to 2.94% and the two-year from 2.33% to 2.73%. The two to 10-year yield curve (two-year minus 10-year yield) inverted briefly early in the month.

The UK 10-year yield rose from 1.61% to 1.91% and the two-year increased from 1.36% to 1.61%. Bank of England (BoE) Governor Andrew Bailey acknowledged UK policymakers are walking a “tightrope” between inflation and the danger of the shock to household incomes that higher interest rates could represent.

In Europe, the German 10-year yield rose from 0.55% to 0.94% and the Italian 10-year yield rose from 2.04% to 2.77%. Europe saw continued surging inflation and speculation around monetary tightening. European Central Bank President Christine Lagarde repeated the message that asset purchases will end early in Q3 and rates could rise this year, but the governing council will maintain “optionality”.

Corporate bonds saw negative total returns and underperformed government bonds. High yield saw the more significant spread widening though spreads remained below the highs seen earlier this year. (Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade).

Emerging market (EM) bonds saw negative returns too, particularly sovereign debt, while corporate credit was more resilient. EM currencies weakened as the US dollar performed strongly, particularly in Latin America and central and eastern Europe. The Chinese yuan also declined notably. 

Convertible bonds re-found some of their traditional protective qualities in April. The Refinitiv Global Focus convertible bond index shed -4.1% in US dollar terms, implying downside protection of c.50% compared to the MSCI World’s fall of c.8%. New issuance of convertible bonds remains lacklustre with a volume of just over US$10 billion since the start of the year. This compares to a volume of more than US$60 billion for the same period last year.

Commodities

The S&P GSCI Index achieved a positive return in April as higher prices in the agriculture and energy components offset weaker prices for industrial metals, livestock and precious metals. Energy was the best performing component of the index during the month amid rising demand, as the global economy normalises after the Covid-19 crisis, and supply curbs due to geopolitical issues such as Russia’s ongoing invasion of Ukraine.

Within the agriculture component, prices for corn and wheat were sharply higher on continuing fears that the ongoing war between Russia and Ukraine could hinder supplies (Russia and Ukraine account for around 30% of global wheat exports).

In industrial metals, the price of aluminium was sharply lower in April. Copper and lead also saw significant price declines in the month, while price falls for nickel and zinc were more muted. Within precious metals, the price of silver was significantly lower in April, while the decline in the price of gold was less pronounced.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

A review of markets in November when the identification of a new Covid-19 variant sent shares lower.

• Global equities fell in November, with fears over the new “Omicron” variant of Covid-19 weighing on sentiment.
• In bond markets, weaker risk appetite led government bond yields lower (meaning prices rose).
• Commodities fell with oil prices lower amid worries the new variant could result in reduced demand.  

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US stocks traded slightly lower in November. Investors grappled with both a hawkish tilt to commentary from the Federal Reserve (Fed) and the emergence of a new coronavirus variant. Chair of the Fed, Jerome Powell, noted that the strength of the US economy combined with the threat of persistently higher inflation meant a swifter tapering of asset purchases – currently under way at a rate of $15 billion a month – is under consideration. At the same time, the emergence of the Omicron variant of Covid-19 has cause some to question the sustainability of the economic strength and advocate for more patience.

As it stands, unemployment in the US is low, having fallen to 4.6% in the latest (October) release from 4.8% in September. Retail sales have been growing for several months and industrial activity, as measured by composite PMI data, is robust. But pent-up demand continues to vie with supply constraints, adding to other contributing factors in higher inflation such as stimulus measures. Consumer price index inflation (CPI) rose 0.9% last month after gaining 0.4% in September, significantly higher than expectations.

The S&P500 declined slightly over the month, as investor sentiment stabilised towards month end. The financials, communication services and energy sectors were amongst the weakest areas of the market. The technology and consumer discretionary sectors held up better, eking out small gains. In particular, US chipmakers gained strongly on expectations that despite current supply constraints, robust demand should ultimately be reflected in future earnings.

Eurozone

Eurozone shares fell in November as rising Covid-19 cases saw some countries re-introduce some restrictions on activity. At the end of the month, the discovery of a new “variant of concern” added to investors’ worries that more restrictions may be needed, potentially damaging business activity.

The weakest sectors for the month were energy and financials. Sectors that are sensitive to the economic reopening and recovery fell on fears the new Omicron coronavirus variant could result in lower demand. The best performing sector was communication services amid merger & acquisition activity. Private equity group KKR launched a €33 billion takeover offer for Telecom Italia.

The flash November estimate put eurozone annual inflation at 4.9%, up from 4.1% in October and well above the European Central Bank’s 2% target. It is the highest inflation level in the single currency era. However, the European Central Bank (ECB) remained reluctant to tighten monetary policy. Christine Lagarde, president of the ECB, said that the current price pressures would fade by the time tightening measures took effect.

Germany’s coalition talks reached a conclusion. Olaf Scholz of the Social Democrats (SPD) will succeed Angela Merkel as chancellor with his party in a coalition government with the Greens and Free Democrats (FDP). Climate targets are expected to be a key focus for the new government. Meanwhile, the EU released its first ever estimates of quarterly greenhouse gas emissions. This showed emissions for Q2 2021 were up 18% on the previous year, when activity was hit hard by Covid-19 lockdowns.

UK

UK equities fell over November. In line with many other markets, economically sensitive areas underperformed, including the energy (sharp decline in oil prices) and financial sectors. Areas reliant on reopening, such as the travel and leisure sector (airlines, hotels) performed particularly poorly. This occurred as international travel restrictions as well as domestic measures were reintroduced in response to Omicron.

Financials lagged due to a combination of factors related to the news that the Covid variant was of concern to world health authorities. These related factors included fresh uncertainty as to when developed market central banks might raise interest rates. Additionally, the expectation that China would maintain a zero tolerance approach to the virus added to fears the variant would have a severe impact on business activity, and on UK quoted companies exposed to the country.

At the beginning of November the Bank of England (BoE) refrained from increasing base lending costs, confounding expectations it would become the first major developed market central bank to do so. Some domestically focused areas of the market proceeded to bounce back on this news, reversing underperformance of recent months, when it was thought the BoE would be forced to cool economic activity to get a handle on consumer price inflation.

Consumer-facing domestic sectors, such as housebuilders and retailers, and domestically focused travel and leisure stocks, such as pub companies, helped small and mid-cap (SMID) equities recoup some of the ground lost since the summer –  up until the point of the Omicron news. Many of these companies then experienced very sharp sell-offs as some Covid restrictions were reintroduced, including the wearing of face masks, which contributed to UK SMIDs underperforming over the month as a whole.

Japan

The Japanese stock market declined by 3.6% in November as initial optimism over the reopening of Japan’s domestic economy was reversed sharply in the final week on news of the Omicron variant. Currency markets also changed direction, with yen weakness in the early part of the month quickly reversed as investors sought safe-haven assets during a period of greater uncertainty.

Renewed short-term uncertainty over the new Covid variant has temporarily obscured an increasingly positive outlook for Japan. Prior to this, a stable political situation had emerged as Prime Minister Kishida formed his new cabinet after the general election at the end of October. Details also gradually emerged in November of a substantial fiscal stimulus package, which is slightly larger than previous expectations and could have a significant impact on GDP in 2022.

The government is making a significant effort to reinforce the recovery in the domestic economy following the lifting of the state of emergency at the end of September. Within the stimulus package, there is a particular focus on boosting consumption, by giving direct cash handouts. Although the timing of the package was not a surprise, the actual content has been influenced somewhat by the change in prime minister and the strength of the LDP’s victory in the general election.

Economic data released in November provided few surprises as higher commodity prices and supply-chain constraints continue to impact the economy. Industrial production numbers are also influenced by the production cuts announced by Japanese auto makers as a result of the global semiconductor shortage. Historic data for Q3 GDP, released in mid-November, showed a contraction in the overall economy, primarily due to the state of emergency that remained in place throughout the quarter, but this result had no major influence on sentiment. Meanwhile, inflation crept back into positive territory as several one-off factors begin to drop out, but there is still little chance of Japan experiencing a short-term inflation spike as seen elsewhere.

Asia (ex Japan)

Asia ex Japan equities declined in November amid a broad market sell-off following the emergence of the Omicron variant of Covid-19. Investors feared the new variant could derail the nascent global economic recovery. The news comes amid a surge in new Covid-19 cases in some parts of the world.

Singapore was the worst-performing index market in November as investors continued to track developments surrounding the new Covid-19 variant and whether existing vaccines would prove to be less effective. There were fears that the city-state’s government may have to scale back some recently relaxed curbs. Chinese stocks were also sharply lower in November, along with neighbouring Hong Kong, on fears that new lockdown measures would be instigated following the rapid spread of a new Covid-19 variant.

Share prices in Thailand, South Korea and Malaysia recorded significant declines in November. Share prices were also weaker in Indonesia and India in the month, although the declines were less pronounced than in some index markets. Taiwan and the Philippines were the only index markets to achieve a positive return during November, although the gains in both markets were modest.

Emerging markets

Emerging market equities were down in November as early month gains were more than erased. Market expectations for earlier Fed policy tightening, together with uncertainty over the outlook for growth and inflation created by the Omicron variant, weighed on risk appetite.

Turkey, where the lira depreciated by more than 27%, was among the weakest markets in the MSCI EM index. During the month the central bank continued to cut its policy rate, despite ongoing above target inflation. Hungary and Poland underperformed amid concern that more rapid interest rate hikes could be required. Net energy exporters, notably Russia but also Saudi Arabia and Colombia, lagged as crude oil prices fell. China underperformed the index, while markets which were set to benefit from ongoing economic reopening, such as Thailand and Greece, also finished behind the index.

Conversely, the UAE was the best performing market in the MSCI EM index, supported by strong performance from telecoms company Etisalat Group. Chile, where first round presidential election results were well received by markets, the Philippines and Taiwan all posted positive returns and outperformed. Taiwanese equities were led higher by semiconductor related names which benefitted from rising expectations for metaverse, or augmented reality, demand growth.   

Global Bonds 

The emergence of the Omicron Covid-19 variant punctured risk sentiment in November. Government yields fell and the US dollar rallied, while stocks and high yield credit sold off. The oil price fell sharply due to concern over global demand.

Yields were buffeted through the month, as inflation indices in the US, Europe and UK remained elevated. The US consumer price index rose 6.2% year over year in October, the highest level since 1990.

The US Federal Reserve rhetoric turned increasingly hawkish over the course of the month. Chair Powell and other members of the policy committee suggested tapering could be accelerated and that they may stop referring to inflation as “transitory”. Nevertheless, the US 10-year Treasury yield fell from 1.56% to 1.46% over the month, with an intra-month high of 1.69%. The yield curve flattened further, as the 2-year yield rose from 0.50% to 0.57%.

The German 10-year yield fell from -0.09% to -0.34%. The Italian 10-year yield from 1.13% to 0.98%. European Central Bank (ECB) President Christine Lagarde told the European Parliament that rate rises next year are unlikely. Eurozone inflation rose 4.1% year on year in October.  

The UK 10-year yield fell from 1.03% to 0.81%, moving markedly lower as the Bank of England left the policy rate unchanged, against market expectations.

The risk-off move was reflected in corporate bonds. Investment grade credit saw flat total returns (local currency), but underperformed government bonds. High yield (HY) declined, with spreads widening sharply in the final week of the month. US HY fell -1.0% while the euro market declined -0.6%. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

There was mixed performance across both hard and local currency emerging market (EM) debt. EM currencies declined. The Turkish lira fell sharply as the central bank cut rates despite a double digit rate of inflation.

Convertible bonds were dragged down by equity market headwinds and shed -2.6% for November. Primary markets were strong and $17 billion of new convertibles were launched. The combination of falling equity markets and strong primary market supply resulted in a general cheapening of convertible bonds. Valuations of European convertibles were hit the most.

Commodities

The S&P GSCI Index recorded a negative performance in November, driven lower by sharp declines in the price of oil following a broad market sell-off triggered by the emergence of the Omicron variant of Covid-19.

Energy was the worst performing component of the index in November. The industrial metals component also recorded a negative performance in November, with lower prices for zinc, lead, aluminium and copper. The precious metals component also declined in November, with lower prices for both silver and gold. The agriculture component was negative overall, with a sharp decline in the price of cocoa. Conversely, the price of coffee was significantly higher in November. Livestock was the only component of the index to record a positive performance in November.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

A look back at markets in May when shares moved up on re-opening and vaccine optimism, although rising inflation sparked some concerns.

• Developed market equities gained in May with the ongoing vaccine roll-outs and fiscal stimulus measures helping to offset concerns about rising inflation. Emerging market shares also advanced, aided by US dollar weakness.
• Government bond yields were little changed in May. US investment grade corporate bonds produced a solid total return and continued outperforming Treasuries.
• Commodities gained, with precious metals the best-performing index component.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities rose in May. Economic momentum showed further signs of acceleration as industries reopened and vaccine roll-outs continued, which lifted investor spirits.

The composite purchasing managers’ index (PMI) rose to 63.5 in April, indicating significant expansion. Driven by the services component, this suggests the services recovery is now underway. The PMI is an index of business activity based on a survey of private companies in the manufacturing and services sectors. A reading above 50 means the economy is expanding.

Headline consumer price inflation rose 4.2% year-on-year (y/y) in April, the highest level since September 2008 and sparked some nascent concern it could prompt tighter monetary policy. Federal Reserve (Fed) officials have indicated cautious optimism about the recovery, with some members being open to discussing tapering “at some point in the upcoming meetings”, if the economy continued to make rapid progress.

A blot on the otherwise bright landscape, non-farms payrolls added just 266,000 jobs last month compared with economists’ expectations of almost one million positions created over the month. While leisure and hospitality added 331,000 jobs, there were losses in other sectors of the economy, including car manufacturing, temporary help and retail. Moreover the unemployment rate edged up to 6.1%. Car manufacturing has been hit recently by disrupted supply chains.

Corporate earnings reflected the economic vigour, with Q1 earnings on track to be the strongest in over a decade. The strongest performance was by equities sectors closely tied to economic growth such as energy and materials, which performed well. Consumer discretionary lagged, partly as a shortage of semiconductors has caused shutdowns in auto production.

Eurozone

Eurozone shares posted another advance in May and outperformed other regions. The vaccine roll-out continued to pick up the pace in several countries. As of 31 May, 43% of the German population had received at least one vaccine dose with France and Italy on 38%, according to Our World In Data.

Restrictions on social and economic activity were generally loosened further. This resulted in greater optimism over the economic and business outlook for the rest of the year. The energy, financials, consumer staples and discretionary sectors led the advance while healthcare, information technology and utilities were laggards.

Shares were further supported by an exceptionally strong corporate earnings season, even accounting for the soft comparison with Q1 2020. Sectors that are sensitive to the economic cycle fared well in terms of earnings, benefiting from a combination of demand recovery, pricing power and supply constraints.

Forward-looking data continued to be very encouraging. The flash composite PMI rose to 56.9, a 39-month high, with the services component rising strongly as easing Covid restrictions helped fuel higher demand. Despite the improving economic outlook, European Central Bank (ECB) policymakers signalled that it is too soon to withdraw stimulus measures. Annual inflation was confirmed at 1.6% for April although this rose to 2.0% for May.

UK

UK equities rose over the month with a number of domestically focused sectors performing well as confidence grew around the re-opening of the economy.

The government pushed ahead with the latest easing of lockdown measures amid a rise in infections related to the ‘Indian’ variant of Covid-19. Concerns as to whether the variant might delay the removal of social distancing laws on 21 June did result in some domestically focused sectors giving back some of their recent very strong gains. However, in general, the outlook for UK consumers and businesses improved, resulting in various forecasters upgrading GDP predictions.

The Bank England announced plans to slow its quantitative easing programme. Investors were preoccupied by the potential implications should the current pick-up in inflation, from a very low base in 2020, be sustained. It was against this backdrop that the domestically focused banks and life insurance companies outperformed the overall market.

In contrast, large internationally diversified financials were negatively impacted by sterling strength and a weak US dollar in particular. Likewise, the lowly valued internationally diversified resources companies underperformed. Fears over currency impacts on their dollar earnings outweighed the ongoing strength in crude oil and industrial metal markets. The utilities sector performed very well amid rising wholesale electricity prices, in an otherwise mixed month for less economically sensitive, or defensive areas of the market. Merger and acquisition activity reaccelerated with a number of new deals announced.

Japan

After a sharp decline in the second week of May, the Japanese stock market subsequently recovered as global inflation fears receded to close up 1.4% for the month. The yen weakened slightly against the US dollar which provided some support for equity market sentiment. 

Although the rate of Covid infections in Japan remains markedly below most other countries, the persistent increase in cases led the government to extend the state of emergency throughout May in several areas, including Tokyo. This, together with slow progress in the vaccine roll-out, further damaged the credibility of the Suga administration. Although we could still see additional restrictions imposed, the political timing is now complicated leading into the start of the Olympics in late July. Towards the end of May we have seen a substantial acceleration in the vaccination rate as several mass vaccination centres finally started operation.

Consumer sentiment has inevitably been impacted by the latest restrictions imposed under the state of emergency. However, real-time data suggests the real effects may be slightly milder than those seen in previous periods of restriction.

The corporate results season was completed in May with the majority of companies reporting numbers in line with, or slightly ahead of, consensus expectations. The number of companies reporting profits below expectations has been significantly lower than normal in each of the last two quarterly earnings seasons. This positive skew in results is mainly due to successful programmes of cost control across multiple market sectors. Meanwhile, the ongoing global recovery is continuing to support industrial production.

Asia (ex Japan)

Asia ex Japan equities recorded a modest gain in May. Although shares were weaker earlier in the month, on the back of higher-than-expected US inflation data, equities recovered later in the month, driven by a weaker US dollar.

India was the strongest market in the MSCI AC Asia ex Japan index. This strong performance came despite the country grappling with rising numbers of Covid-19 infections and India remains one of the countries worst-hit by the pandemic. The Philippines and Pakistan also achieved strong gains in the month and outperformed the index. Gains achieved by China, Hong Kong and South Korea were more modest. In China, the slow roll-out of Covid-19 vaccines and regulatory concerns over the country’s technology sector held back market returns.

Increasing Covid-19 infections in a number of countries weighed on returns in a number of markets in the index, with Malaysia, Singapore and Thailand all ending the month in negative territory. Shares in Taiwan also declined in May, as a rise in Covid-19 infections prompted the imposition of tighter restrictions. By sector, energy, utilities and healthcare were the strongest, achieving solid gains in May. Conversely, consumer discretionary, communication services and information technology were all weaker, ending the month in negative territory.

Emerging markets

Emerging market (EM) equities generated a positive return amid ongoing signs of global economic recovery and the transition out of the pandemic. US dollar weakness was beneficial. The gains came despite a sell-off early in the month, as a higher-than-expected US inflation reading renewed concerns over the timing of global monetary policy tightening.

The euro-linked economies of Hungary, Poland, and the Czech Republic were among the best performing markets. Stronger commodity prices were supportive of a number of EM including Peru, Russia, Brazil and South Africa. India also outperformed the MSCI EM index amid signs that the current wave of Covid-19 may be peaking. By contrast, Chile registered a negative return as policy uncertainty increased. Egypt also finished in negative territory, as did Taiwan which saw an outbreak of coronavirus cases. China, where the government announced new regulations for the technology sector, and South Korea also posted slightly negative returns and underperformed the index.

Global Bonds 

Government bond yields were little changed in May, consolidating having sold-off since the start of the year. The US 10-year Treasury yield was three basis points (bps) lower at 1.59%, and the UK’s 10-year fell 5bps to 0.80%, both having risen significantly year to date.

Bond yields rose earlier in the month, as data showed headline US consumer price inflation rose 4.2% year on year in April. US core personal consumption expenditure, which excludes food and energy, rose 3%, the largest increase since 2006.

European yields continued to rise initially, with the vaccine roll-out and economic recovery gaining traction, then fell in the last week of May on dovish comments from the ECB.

The 10-year Bund yield increased by 2bps to -0.19%, reaching an intra-month high of -0.11%. Italy’s and Spain’s finished unchanged, at 0.91% and 0.46% respectively, after declines of 12 and 8bps in the final week.

US investment grade (IG) corporate bonds produced a solid total return and continued outperforming Treasuries. European IG was marginally weaker, in line with government bonds. High yield corporate bonds saw further positive returns, but due to income. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market bonds made positive returns, ahead of developed markets, led again by high yield. Commodities prices continued to rise. Emerging market currencies broadly performed well as the US dollar weakened. 

Despite the tailwind of positive equity markets, the convertible bonds universe came under pressure in May. Information technology, disruptive consumer names, and the “Covid winners” in general ended the month with a loss. The Refinitiv Global Focus index, which measures balanced convertible bonds, shed -0.7%.

Commodities

The S&P GSCI Index recorded a modestly positive return in May, reflecting how the economic rebound in the world’s largest economies is bolstering demand for metals, food and energy while supplies remain constrained. The increase in May was more muted than in recent months on growing concerns over inflation. Precious metals was the best performing component of the index, with strong gains for both gold and silver. Industrial metals also achieved a good performance in May, led by gains for zinc and copper.

The energy component was also higher in the month, led higher by heating oil and gasoil. Crude oil and Brent Crude also gained during the month, reflecting how countries around the world are starting to return to normal patterns of consumption. In the livestock sector, prices for feeder cattle and lean hogs gained while prices for live cattle were modestly lower in the month. The agriculture sector recorded a negative performance over the month, led by sharp declines in wheat and Kansas wheat. Cotton was also lower in the month, while coffee recorded a strong gain.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.