A mixed but positive month: May 2021 in review
The mid-May market correction created a somewhat mixed month. However, as the month ended, it was mostly only cryptocurrency holders that feel real pain. For globally diversified investors, May ended on a calmer footing. Global equities ended the month down 1.1% in sterling terms.
Regionally, Europe markets led the way, rising 1.5%, as the continental vaccination programmes accelerated, businesses started reopening and economic activity picked up. Growing optimism was also evident with PMI surveys of business sentiment signalling growth prospects for the summer months.
In the UK, equities ended the month ahead 1.1%, and is now the best performing market, year to date, up 10.5%. In the US, inflation is now at 4.2% year-on-year, creating uneasiness around potential central bank intervention. Despite Fed reassurance, the S&P 500 main market declined 1.7% (-4% for the tech-heavy NASDAQ) on the back of increased inflationary pressure.
Overall, Emerging Markets ended the month with a small decline of 0.3%. China is focusing on tightening regulatory regimes – with specific reference to cryptocurrencies and commodities – which led to a small decline in equity values.
While ‘sell in May and go away’ is the traditional (pessimistic) wisdom, it appears optimism following the successful vaccination programme and pent-up consumer demand continues to support equities and summer expectations. In fact, there is rising optimism for stronger economic growth globally in the second half of 2021, especially for those countries making good progress on vaccination rates, and we expect that positivity to broaden out.
It would seem investors have moved on from the question of whether there will be growth. Now they are wondering just how strong it could be. This has led to uncertainty on just what central banks would do as a result of that strength. Higher inflation is causing nervousness, which some think could trigger interest rate increases and restrain the economic rebound prematurely. This certainly explains some of the market volatility in May. So far, central banks have stood firm and clearly indicated today’s price rises are temporary, and mostly caused by COVID-disrupted supply chains, so these pressures should moderate as supplies of good and services adjust over time.
Equities are positioned well against a backdrop of normalising inflation rates, and for businesses, stronger sales growth can help offset higher costs. Additionally, rising demand generally makes it easier to pass higher costs onto consumers, ensuring profit margins are not squeezed.
It is hard to deny that equity markets, especially those in the UK, have made a solid start to 2021. However, rising optimism should not lead to complacency, and we would not be entirely surprised if markets remain choppy in the near term. Overall, the path ahead looks brighter than it did last year, which should mean equity markets remaining positive for the medium term.
Asset class returns at 31st May 2021
