Looking at aggregate returns for last month, you might think May was a dull affair for capital markets. In sterling terms, global equities were practically flat, gaining just 0.3%. This matches the small climb seen over the last three months: sterling investors saw the value of their global stock holdings grow 1% through the spring. But the seemingly prosaic headline figures hide some stark variation and nerve-wracking volatility. Markets bounced from fear to excitement and back, with the biggest concerns coming from the US debt ceiling drama and disappointing Chinese growth. As ever, the interplay between growth, inflation and expectations for central bank policy were key – leading to some regions and sectors being much more harshly punished than others. The table below shows returns for May across major regions and asset classes.
UK investors will be more aware than anyone of last month’s volatility and dispersion, as UK large-cap equities were among the worst performers of any developed market, falling 4.9% in May. Previously, the FTSE 100 had shrugged off much of the wider pessimism around the UK economy, evidenced by the index’s strong performance in April. Persistent inflation and continued monetary tightening undid that goodwill, though. UK inflation fell in April, but not as much as expected – pushing the Bank of England (BoE) to issue more harsh warnings on interest rate rises. As markets digested the sharply higher rate probability, ten-year gilt yields rose near to the disastrous highs of October last year.
Though Britain fell furthest, European equities were not far behind, dropping 4.3% in sterling terms. That was despite some positive economic developments over the month, mainly around falling energy prices. The rapid drop-off in wholesale natural gas prices has been extremely welcome for European policymakers, leading to some unexpectedly low inflation numbers recently. Positivity even led to a record high for Germany’s DAX index mid-month. But as we wrote recently, tightening labour markets (particularly in Europe’s so-called periphery nations) and poor fiscal metrics are keeping monetary policy tight. However, despite a similar monthly fall, European stocks are down by a much smaller 1.2% over three months.
Elsewhere, emerging market equities fell 0.3% in May. But this muted, virtually sideways trading should probably be seen as win, given the disappointment around China. The world’s second-largest economy – and by far the biggest component of MSCI’s EM index – has been struggling under the weight of expectation for months now. It was hoped that the post-Covid reopening, and growth-supportive policies from Beijing, would turbocharge the Chinese economy in a similar way to the west’s post-pandemic growth spurt. But recent data has proved much weaker than expected, leading to a stock market reversal. China’s CSI 300 index fell nearly 6% in May, losses which have only worsened since. Disappointing trade data was also a factor behind the aforementioned poor performance in Europe. The upcoming visit of US Secretary of State Antony Blinken – the first since the ‘spy balloon incident’ some months ago – might at least be a sign that relations with China’s largest trading partner might improve. Beijing certainly has every incentive to pursue that improvement now.
On the other end, May’s standout performer was Japan, with the Topix index rising 3.3% in sterling terms. Mid-May, it reached its highest value in 33 years – a feat it bettered this week. Moreover, the rally was broad-based across sectors, pumped up by improved consumer sentiment, optimism around manufacturing and – perhaps most importantly – growth in the technology sector. The world’s third-largest economy looks perhaps the brightest it has since its market bubble burst three decades ago.
For all the Japan-specific hype, it is no surprise that its technology sector was one of the biggest return drivers. In the US, the S&P 500 rose 1.9% through May in sterling terms but, once again, the headline figure hides a huge amount of sectoral variation. Large technology stocks in the NASDAQ index stormed out in front of their market peers, returning 7.4%. In part, this reflects better-than-expected earnings results and the feeling that US interest rates are approaching their peak (since tech stocks are long-duration and therefore extremely sensitive to interest rates). But US tech investors seem to have also been swept up by the artificial intelligence (AI) craze. Since the release of ChatGPT a few months ago, investment has poured into AI-related companies – whether direct or indirect.
US large cap tech stocks have gained 10.6% over the last three months, and are up a staggering 20.4% since the start of the year. More favourable financial conditions are again a huge factor behind this, but the current AI drive – and crucially, its public visibility – has brought back a sense of long-term optimism in a sector which some saw as too concentrated or stagnant.
This is understandable, but as ever we add a note of caution. Productivity improvements are the ultimate drivers of long-term growth and should be celebrated, but short-term market mania can often be a detriment to those improvements. One only need look at cryptocurrencies over the last few years – or the dotcom bubble decades ago – to see these dangers. Hopefully, improving expectations for US monetary policy will keep the goodwill going in capital markets. After numerous financial and economic woes in the last year, an overexcitement problem would not be any help.
Asset Class returns as at 31st May 2023
The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.
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