May 2022 was the definition of a rollercoaster month of equity performance. Equity markets rose in the first few days of May, followed by a rapid sell off, eventually recovering to finish the month down 0.3%. Bond returns were virtually flat as well and even commodity prices could only gain a net 1% in May.
In regional terms, the US equity market dropped 0.2%. The US technology sector struggled even more during the month, declining 2.3%. European equities closed the month flat, up only 0.1%. Emerging Markets also ended the month slightly unchanged, up only 0.1%. Japanese equities were the best performing equity market in May, rising 1.3%. The UK also ended the month in positive territory, up 1.1%, Oil prices climbed 7.5% over concerns around tight global supplies.
Markets remain under the influence of combining headwinds; tightening monetary policies, higher living and energy costs and slowing economic activity in China as a result of continuing zero COVID policy.
There is debate about which of these factors has the most impact. Consumer demand has fallen on the back of sharply higher prices, central banks are unequivocally in tightening mode COVID restrictions have weakened the Chinese economy – but production has held up better than other components, and this acts as a counterbalance to global inflation.
The impact of the headwinds has been to slow growth indicators in the western world significantly, and in China they have all but collapsed. The first weeks of May were dominated by recession assumptions of ‘when’ rather than ‘if’.
However, May was a long month in terms of sentiment and switched from an assumed recession to more optimism. Central bank action to tighten fiscal policy and control inflation benefited from the market slump which helped its aim to cool the economy, leading to a hope that the US Fed in particular will not put the brakes on any harder for the time being.
While growth was in focus, inflation fears have not disappeared and the peak in inflation does not imply a quick turnaround in Fed policy. The lagged impact from housing costs, steady wage gains and tight labour markets in the U.S. as well as slow improvement in global supply chains means that inflation rates are likely be slow to fall. In the UK, the Bank of England’s (BoE) latest growth forecasts, which predicted inflation of more than 10% by the end of the year, and a shrinking economy in 2023.
The weakness in China has helped cool global inflation, even if. China’s COVID outbreaks and the government’s zero-COVID policy have forced lockdowns across the world’s most populous nation, dramatically reducing consumer demand. This gives temporary respite as we battle with sharply higher prices, but ultimately the world economy will suffer if China continues to flag – much of world remains under inflationary pressure as the impact of higher energy prices and food costs filters through emerging Asian markets as well as developed ones across Europe.
Asset class returns as at 31st May 2022
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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