Monthly Markets Review – May 2020

A review of markets in May when shares were supported by an increasing focus on how lockdowns would be lifted.

  • Equity markets rose on the whole in May as Covid-19 lockdown measures began to be lifted and further support measures were announced. Escalating tensions between the US and China, however, limited emerging market equity gains.
  • US shares gained ground amid optimism over the re-opening of the economy. Q1 GDP growth was revised down to -5.0%, compared to the first estimate of -4.8%.
  • Eurozone equities advanced as some countries began to allow some parts of their economies to reopen. The European Commission proposed a €750 billion recovery package.
  • UK equities rose in May. A number of economically sensitive areas performed well amid the improvement in investor sentiment. Sterling fell as worries over a no-deal Brexit resurfaced.
  • Japanese shares posted gains, with pharmaceutical stocks leading the advance. Lockdowns across the country were lifted in stages during the month.
  • Emerging market (EM) equities advanced but underperformed developed markets. Performance was dampened by the re-emergence of US-China tensions.
  • Corporate bonds outperformed government bonds as the more optimistic backdrop saw investors favour higher risk assets. US 10-year government bond yields were little changed during the month.

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 equities gained in May, with investors cheered by plans to ease the Covid-19 lockdown measures both domestically and in many countries around the world. Every US state had made plans to reduce restrictions by mid-May. The US dollar fell, becoming less attractive as a safe haven as risk appetites climbed. The rise in optimism came in spite of the confirmation that the economy had contracted by slightly more than expected in Q1.

Real GDP for Q1 was revised down to an annual rate of -5.0%, a bigger decline than the 4.8% drop first estimated. It was the biggest quarterly drop since an 8.4% fall in Q4 2008. Much of the weakness was due to a sharp fall in consumer spending, especially in consumer purchases of services. In addition, there were some concerns that the US-China trade relationship could sour again. However, neither issue managed to recapture investor focus, which landed on economies restarting around the world.

US equities rose in line with other world equity indices. All sectors in the S&P 500 rose with materials and industrials, more cyclically-exposed, performing strongly. IT stocks were once again notable outperformers. Consumer staples and energy lagged behind the wider market but still made positive progress.


It was another month of gains for eurozone shares in May as many European countries began to ease out of lockdown. Stock markets were further supported by news of the EU’s plans for post-coronavirus recovery.

European Commission president Ursula von der Leyen called for the power to borrow €750 billion for a recovery fund to support those EU regions that have been worst affected by Covid-19. This would be in addition to the €540 billion rescue package agreed in April. She also proposed a new suite of taxes to pay back the debt. The plan still needs the approval of member states, with the recovery fund expected to be on the agenda for the 19 June European Council summit. In addition, comments from European Central Bank (ECB) board members suggested that the ECB’s asset purchase target could be increased at the June meeting.

All sectors saw positive returns with gains for both economically-sensitive sectors and those perceived to be more defensive. The industrials and utilities sectors were among the top gainers while energy and consumer staples saw a smaller advance. Forward-looking economic data showed how activity is picking up as lockdowns started to be relaxed: the Markit composite purchasing managers’ index (PMI – a survey of companies in the manufacturing and service sectors) rose to 30.5 in May from 13.6 in April. However, this is still well below the 50 mark that separates expansion from contraction.


UK equities rose over the period. A number of economically-sensitive areas of the market outperformed amid the general improvement in investor sentiment. The mining sector performed particularly well in response to a recovery in Chinese industrial activity.

The government began to ease lockdown measures with people encouraged to return to work where possible and a phased reopening of the retail industry and schools confirmed. Meanwhile, the UK’s departure from the EU returned to the agenda as the end of June deadline to extend the Brexit transition period, which expires on 31 December 2020, came into view.

Renewed concerns that the country could be heading for a “no deal” Brexit weighed on sterling, as did the prospect of negative interest rates. The Bank of England governor told parliamentarians that negative rates were under “active review” while the Debt Management Office confirmed it had sold negative yielding gilts for the first time.

The Office for National Statistics reported that the UK economy had contracted by 2% in Q1 2020 as lockdowns in response to the Covid-19 pandemic took their toll on activity towards the end of Q1. The preliminary estimate was less negative than consensus estimates, though it does represent the largest fall in GDP since the fourth quarter of 2009 and the global financial crisis.


The Japanese market rose steadily for most of May to end with a positive total return of 6.8%. The yen was quite stable, weakening just marginally against the US dollar during the month.

Equity investors globally have responded to an assumed reopening of economic activity, although the actual path for any return to a more normal environment for corporate earnings remains very uncertain. The Japanese market was led up in May by pharmaceuticals. There was a brief recovery for some financial stocks, including leasing companies, together with airlines, which have been among the hardest hit sectors throughout this crisis. Small caps also performed relatively well and have now recouped almost all of the underperformance seen from January to mid-March.

The results season concluded for the fiscal year, which ended in March. Investors have naturally focused more on the outlook than the historical results, but only a minority of companies have provided any guidance for the fiscal year to March 2021. 

Japan’s statistics on both the infection rate and the mortality rate from coronavirus remain significantly better than most other developed economies. The population seems to believe this is more by luck than judgement on the part of the government: the public’s approval rating of Abe’s administration has fallen to its lowest levels since he became prime minister at the end of 2012. Nevertheless, the prime minister was able to announce a staged lifting of the state of emergency, starting from 14 May for some prefectures and culminating on 25 May for Tokyo. Abe’s cabinet drew up a second supplementary budget in May, as expected.

Asia (ex Japan)

Asia ex Japan equities bucked May’s global market trend by posting a loss.  Hong Kong, where a new national security law was proposed, was the worst-performing market in the region. The other Greater China markets of China and Taiwan also posted losses as Beijing’s relationship with the US became strained once again amid talk of delisting Chinese companies from US markets and imposing compensatory tariffs for Covid-19.

Elsewhere, India, where the financial sector was as drag, also posted a loss, so too did Singapore. Meanwhile, a better-than-expected earnings season boosted the Korean market, while the ASEAN (Association of Southeast Asian Nations) markets of Thailand and Malaysia also posted strong gains. Across the region, the worst-performing sectors were real estate and financials, while healthcare and consumer discretionary outperformed.

Emerging markets

Emerging market (EM) equities registered a positive return in May, as lockdowns began to ease worldwide, although performance was dampened by the re-emergence of US-China tensions.

Argentina was the best-performing index market. Brazil, where the central bank promised to intervene to support the currency if necessary, and Russia, aided by currency strength and a rally in crude oil prices, also outperformed.

Chile and Egypt, which sought additional support from the International Monetary Fund (IMF), were the weakest index markets. China also lagged behind as the intensifying US-China confrontation expanded beyond trade and technology issues to broader geopolitical tensions and China moved to impose a national security law on Hong Kong.  

Global bonds

Investor optimism grew over the month, with riskier assets performing well. The rate of new Covid-19 infections continued to moderate and various countries started to ease lockdown measures.

Central banks gave assurances that support would continue and, in Europe, there was progress towards a co-ordinated agreement on fiscal support measures. Economic activity data showed some improvement, with higher frequency indicators suggesting the situation is less dire than widely feared. These factors outweighed concerns over renewed tensions between the US and China.

The 10-year US Treasury yield was little changed at 0.65%, trading in a relatively tight range throughout the month. The two-year yield finished slightly lower.

In comparison, European government yields saw meaningful moves, reflecting developments around potential fiscal support. Germany’s 10-year yield rose from -0.59% to -0.45%, while Italy’s fell from 1.76% to 1.49%. The Spanish 10-year yield fell from 0.73% to 0.57%.

The UK 10-year yield was slightly lower, from 0.23% to 0.18%, while sterling weakened. UK yields fell below zero in shorter maturities, reacting to speculation that the Bank of England might be considering employing negative interest rates. The UK’s two-year gilt yield fell from 0.01% to -0.04%.

Corporate bonds outperformed government bonds, with global high yield (HY) returning 4.5% (source: BofAML, local currency) amid stronger demand for riskier assets. The spread on HY (the difference in the yield of a corporate bond versus a similar maturity government bond) tightened by 107 basis points (bps). Investment grade saw total returns of 1.3% (source: BofAML, local currency). Across both, positive performance was driven predominantly by cyclical sectors, which continued to recover ground. Investment grade bonds are the highest quality bonds, as determined by a credit ratings agency, while high yield bonds are more speculative, with a credit rating below investment grade.

The increased demand for riskier assets also led to positive returns for emerging markets bonds and currencies, led by higher yielding markets. Currencies of oil exporters made gains as oil prices recovered. The Mexican peso and Russian rouble were among the strongest performers.

The overall MSCI equity index returned 4.5% in May. Convertible bonds as measured by the Thomson Reuters Global Focus Index, outperformed stocks with a gain of 5.4%. There was a record volume of new issues with $26 billion of new paper which kept valuations low.


There was a bounce-back in commodities markets in May. This was led by oil as Brent rose by 40% amid a loosening of lockdown measures in many countries. Precious metals, led by silver (+19.3%), and industrial metals, led by iron ore (+10%), also gained.

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.

Weekly Bulletin: Upholding Equity Views

Global stocks have recovered more than half of the selloff triggered by the coronavirus pandemic since late March – alongside a sharp contraction in economic activity and corporate earnings. We see the unprecedented policy response to cushion the pandemic’s blow as key to support global equity markets – against a backdrop of historic uncertainty for activity and earnings. We still prefer an up-in-quality stance and like economies with ample policy room as we stay neutral on global equities overall.

Key points

  • Revisiting Equity Views: We favour up-in-quality equity exposures across regions and style factors even as we stay neutral on global equities overall.
  • Key to Policy Response: The key to the policy response has shifted to ensuring successful execution and avoiding policy fatigue before the shock passes.
  • China in Focus: Markets will focus on the delayed annual meeting of China’s top legislature, with expectations for more virus relief measures.

The opinions expressed are as of May 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

Weekly Bulletin: Gauging The Virus Shock

Global economic activity is being frozen to stem the coronavirus pandemic. Yet implications for asset prices will depend on the cumulative impact of the growth shortfall over time. We believe that policy actions to cushion the impact of virus shock are nothing short of a revolution. Execution is a risk, but if successful, the cumulative impact of the virus should be well below that seen in the wake of the 2008 global financial crisis (GFC) — despite the historic scale of the initial shock.

Key points

  • Not a Repeat of 2008: The overwhelming policy response to cushion the coronavirus shock is set to prevent a repeat of the 2008 financial crisis, but execution is key.
  • Oil Slump: Oil prices slumped to historic levels, as a huge demand shortfall has squeezed the limited storage capacity.
  • Data Watch: This week’s US consumer confidence data will shed light on how much impact the containment measures have hit consumer spending.

The opinions expressed are as of April 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

Monthly Markets Review – March 2020

A look back at markets in Q1 2020 when the spread of coronavirus across the world saw stock markets fall sharply.

  • The spread of Covid-19 profoundly affected global markets in the first quarter. Equities suffered steep declines and government bond yields fell (prices rose) as investors favoured their perceived safety.
  • Shares fell across developed markets as coronavirus spread and countries went into lockdown to try to contain the outbreak. Governments and central banks announced measures to support businesses and households and reduce borrowing costs.
  • Emerging market (EM) equities also tumbled, slightly underperforming developed markets as a strong US dollar proved to be an additional headwind.
  • Government bonds saw yields fall (meaning prices rose) as investors sought out assets perceived to be lower risk. Corporate bonds underperformed government bonds.
  • In commodities, oil prices plunged as the spread of coronavirus weakened the outlook for demand, at the same time as there was a breakdown of an agreement between oil producers to constrain supply.

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 equities declined significantly over the quarter as the coronavirus outbreak spread. Confirmed US cases of Covid-19 rose from 150 to over 100,000 between 4 March and 27 March, and the economic impact grew clearer. Jobless claims rocketed by over three million in the last week of March and economic indicators suggest more pain will follow.

The Federal Reserve (Fed) cut interest rates twice in March for the first time since the global financial crisis and announced unlimited quantitative easing (buying bonds). US interest rates now stand at 0-0.25%. The US Senate also passed a $2 trillion stimulus package. The proposed package includes $250 billion worth of direct payments to households, $500 billion for loans to distressed companies and $350 billion for small business loans.

All sectors saw significant declines. Energy stocks were hit hard, with the addition of the oil price war weighing heavily. Financials and industrials also fell sharply. The information technology and healthcare sectors held up better, albeit with what would be considered steep falls in any other quarter.


Eurozone equities experienced a sharp fall in Q1 due to the spread of coronavirus. Italy and Spain became some of the most severely affected countries. Nations across Europe took steps to restrict the movement of people and shut down parts of the economy in an effort to slow the spread of the virus. Growth in Europe was already fragile – the eurozone economy grew by just 0.1% in Q4 2019, with Germany registering zero growth. A sharp economic downturn is expected.

Forward-looking indicators showed how economic activity has collapsed. The flash Markit composite purchasing managers’ index (PMI) for March fell to a record low of 31.4, compared to 51.6 in February. The PMI survey covers companies in both the services and manufacturing sectors, and an index reading below 50 indicates economic contraction.

All sectors fell over the quarter. Defensive areas of the market such as healthcare and utilities held up best. Financials and industrials were among the worst hit sectors. Regulators have pushed for banks across Europe to suspend dividends and share buybacks until at least the autumn. This would help increase their capacity to manage rising non-performing loans as borrowers struggle to make repayments.

The European Central Bank announced the Pandemic Emergency Purchase Programme (PEPP) – a €750 billion scheme. The PEPP will fund the purchase of government and corporate bonds until the end of the Covid-19 crisis. Governments across Europe also announced spending packages to help businesses and households bridge the gap between the loss of income during this period of disruption and the expenditures required to survive.


UK equities tumbled as efforts to deal with the coronavirus pandemic hit economic activity indiscriminately and simultaneously. Prior to these events, domestic politics and Brexit had dominated the narrative around UK assets and the economy for much of the quarter. At the height of the market sell-off, all assets (including government bonds) fell amid fears around the stability of the financial system.

Against this backdrop, sterling hit multi-decade lows versus the US dollar as investors sought safety in cash, particularly US dollars. In line with other central banks, the Bank of England materially reduced interest rates, cutting by 65 basis points to 0.10%. This response was co-ordinated with the UK government, which unveiled an unprecedented series of fiscal support measures, in line with initiatives by many other developed nations.

Oil and gas was the worst performing industry groups over the period, selling off on concerns about falling demand in the wake of the virus, as well as the failure of negotiations between OPEC (the Organisation of the Petroleum-Exporting Countries) and Russia to control the global supply of oil. The consumer services sector also performed very poorly as investors sought to calibrate the effect of a sharp fall in consumer demand as the UK and other governments introduced lockdown measures.


After a relatively stable start to the year, the Japanese market fell steeply in late February and early March before recovering some ground to end the quarter with a total return of -17.5%. Even allowing for the exceptional environment, the yen was extraordinarily volatile through this period but, if anything, has probably remained slightly weaker than one might otherwise expect.

Market dynamics were fairly chaotic, especially during the mid-March rebound, with some days marked by a strong recovery of those stocks and sectors seen as most heavily oversold, while other days seem to represent a more genuine willingness by investors to take on risk in larger cap cyclical sectors (i.e. those that are most sensitive to the economic cycle). Smaller companies have been significantly weaker than the main indices across the quarter, despite some relative recovery in the second half of March. Style influences were also prevalent, as value stocks underperformed across the quarter, with particular weakness in the first half of March. Value stocks are those that tend to trade at a lower price relative to their fundamentals, such as dividends, earnings and sales.

The initial estimate of Q4 GDP growth released on 17 February was much weaker than consensus expectations. Even allowing for the consumption tax increase and the major typhoon, which hit Japan in October, this was a poor data point.

In terms of the actual virus spread, Japan has so far been on a very different trajectory to most other developed nations with a slower spread and lower mortality rate. This has resulted in a slightly less stringent response from the authorities so far. From late March, however, there have been more forceful requests from both central and local governments to curtail social activities and it is possible that more severe restrictions on movements will be imposed on Tokyo in the near future.

The highest profile impact for Japan has been the postponement of the Tokyo Olympics for one year to July 2021. Although this is not particularly significant in economic terms, with maybe 0.2% of GDP shifted from this year to next, there could be political implications as the Games are now planned just before the end of Mr Abe’s term as Prime Minister in October 2021.

Asia (ex Japan)

Asia ex Japan equities declined sharply in the first quarter, as Covid-19 became a pandemic and the prospect of a global recession loomed. US dollar strength was a drag on returns. The MSCI Asia ex Japan Index decreased in value but outperformed the MSCI World Index.

ASEAN (Association of Southeast Asian Nations) markets were notably weak and all underperformed the MSCI Asia ex Japan Index. India also finished behind the index as the number of Covid-19 cases began to increase, and the government announced a national lockdown for at least three weeks. South Korea also lagged behind. Although the country’s response to the crisis appeared to be progressing, the weaker outlook for global trade and growth weighed on the market. 

China and Hong Kong were the only markets to outperform the index. China, seen as ahead of the curve as it was the first country to record cases of Covid-19, took measures to lock down the city of Wuhan. Its measures to contain the spread were deemed a success as the number of active cases of Covid-19 in mainland China appeared to peak in February, and subsequently fell sharply. Meanwhile, the spread of the virus appeared to be relatively contained in Hong Kong.

Emerging markets

Emerging market (EM) equities fell heavily in Q1, negatively impacted by the Covid-19 pandemic. The spread of the virus beyond China led to lockdowns globally and resulted in sharp falls in economic activity. A global recession is now expected this year. Against this backdrop, a stronger US dollar was a further headwind for EM. The MSCI Emerging Markets Index decreased in value and underperformed the MSCI World Index.

Brazil was the weakest market in the index, with currency weakness amplifying negative returns. The central bank cut its headline interest rate by a total of 75bps to 3.75%. It announced measures including reserve requirement reductions for banks and agreed a foreign exchange swap line with the Fed. The government also took fiscal measures to help households and businesses. Colombia was another underperformer as it was additionally impacted by the fall in crude oil prices following the failure of talks to limit oil production. Greece, South Africa and Pakistan all underperformed.

By contrast, China recorded a negative return but outperformed the MSCI Emerging Markets Index as the number of Covid-19 cases declined, and economic activity began to resume. The initial response to the virus outbreak led the authorities to effectively quarantine the city of Wuhan, and the wider province of Hubei. These measures only began to be eased at the end of the quarter. A mixture of interest rate cuts and fiscal (tax and spending) measures were also announced during the quarter.

Global bonds

Government bond yields declined over the quarter, meaning bond prices rose, as higher risk assets such as shares saw heavy declines amid rising fears over the Covid-19 pandemic. Investors favoured the perceived safety of government bonds due to the growing likelihood of a deep global recession. The moves largely occurred in late-February and March as numerous countries went into lockdown in response to the pandemic, seriously depressing economic activity. This resulted in severe declines and extreme daily swings in assets prices on a scale comparable to the crises of 2008 and 2011.

Markets saw extreme declines and volatility in March. US stock market trading was temporarily suspended on a number of occasions due to the size of daily moves and, for several days, companies were unable to issue bonds. Government bond yields and prices were volatile, first reaching extreme lows on heightened fear, but then rising, as panicked investors sold liquid assets indiscriminately in order to raise cash.

As the crisis unfolded, governments and central banks announced unprecedented support programmes for businesses, households and the financial system, helping to stabilise markets later in the month.

The US 10-year yield dropped from 1.92% to 0.63% over the quarter, while the two-year yield dropped from 1.57% to 0.23%. The German 10-year yield fell from -0.19% to -0.49%, France’s from 0.12% to 0%. The Italian 10-year yield rose from 1.41% to 1.57%. Spain’s increased from 0.47% to 0.71%. The UK 10-year yield fell from 0.82% to 0.32%.

Corporate bonds, and emerging market debt and currencies declined significantly, mainly in March, and underperformed government bonds, with moves exacerbated by a sharp tightening in liquidity. For several days, companies were unable to issue bonds although this improved later in the month. US investment grade bonds ultimately saw a record month of issuance in March, as the Federal Reserve announced it would buy corporate bonds. Investment grade bonds are the highest quality bonds, as determined by a credit ratings agency, while high yield bonds are more speculative, with a credit rating below investment grade.

High yield credit was hit hard given the heightened risk aversion. The sell-off was sharper in more vulnerable sectors related to travel and retailing, as well as in energy as the oil price plummeted.

In emerging markets, local currency bonds saw the heaviest falls. Currencies more sensitive to growth and oil prices, and also those with more liquidity, saw double-digit declines, in some cases of around 20%. 

The overall MSCI World Index lost -21.1% in Q1. Convertible bonds, as measured by the Thomson Reuters Global Focus Index, effectively protected investors from losses and finished the quarter with a loss of -8.6% in US dollar terms. In any equity market sell-off (and especially in a vicious sell-off with the speed and extent witnessed in March) the valuation of convertibles comes under pressure. Convertibles have become cheaper in all regions but the traditionally rather efficient US market has seen a sharp 4% drop in valuations.


The S&P GSCI Spot Index experienced a major fall over the quarter. US dollar strength weighed negatively, so too the energy component. Crude oil prices fell heavily as talks between OPEC and other oil producers including Russia failed to agree on extensions to production cuts. This impact was exacerbated by a weaker demand outlook for oil stemming from the impact of Covid-19. Industrial metals also fell, led by copper, as the demand outlook deteriorated. The agriculture component posted a negative return with cotton and sugar prices falling heavily. Conversely, precious metals generated a small gain, aided by an increase in gold prices.

Weekly Bulletin: Upgrading Credit

Unprecedented policy actions to limit the coronavirus shock and sharply lower valuations have improved the outlook for credit, in our view. Major central banks are committed to keep rates low and greatly expand their balance sheets. This underpins demand for corporate bonds and selected sovereign credit. We upgrade our view on global investment grade credit to a moderate overweight from underweight and keep high yield as an overweight.

Key points

  • Policy & Valuations: We upgrade our tactical views on credit on extraordinary central bank support and substantially more attractive valuations.
  • Stalling Rally: The initial market rally from historic US policy actions has stalled as worsening economic data and a rising human toll dominate sentiment.
  • Data Watch: Jobless claims and consumer sentiment data this week are likely to show more signs of economic damage caused by the coronavirus.

The opinions expressed are as of April 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.