Market Opinion - May 2023

Market Opinion - May 2023

Global equity markets faced challenges in May, with most ending in negative territory, except for the US, where the NASDAQ and S&P 500 indexes saw gains. The US debt ceiling played a significant role in the overall underperformance. Weakness in China, driven by disappointing economic data in April and signs of moderating growth, weighed on Asian markets. In the UK, persistent inflation and concerns about further interest rate hikes were the primary focus.

European markets concluded May with losses, as uncertainty surrounding the US debt ceiling weighed on investor sentiment. Weak economic data indicating a global slowdown also contributed to the negative performance. Although inflation fell to its lowest level since February 2022 in May, down by 0.9%, this news was overshadowed by other negative factors. The drop in inflation exceeded consensus estimates, and core inflation (excluding food and fuel) also declined by 0.3%. On the political front, the Spanish prime minister called for a snap general election following a poor showing for the Socialist party (PSOE) in local and regional elections. The opposition party, Partido Popular (PP), made gains and is expected to form a coalition with Vox after the general election.

Equity markets in the UK also experienced declines, primarily due to core inflation reaching a 31-year high. This heightened expectations of additional monetary policy tightening, including interest rate increases, by the Bank of England (BoE). The BoE had already raised interest rates to their highest level since 2008, at 4.5%. The central bank warned that inflation is unlikely to reach its target level of 2% until early 2025. UK GDP showed marginal growth in the first quarter of 2023. The BoE revised its recession prediction and now anticipates the economy to stagnate in the first half of the year, with growth picking up in the second half.

May brought mixed fortunes for the US. While the NASDAQ and S&P 500 indexes ended positively, the Dow Jones declined due to significant losses in companies such as Nike and Walt Disney. The US debt ceiling dominated headlines throughout the month. Ultimately, the House of Representatives voted to raise the debt ceiling, which should help the country avoid a default. However, the bill still requires passage by the President and the Senate, but the vote in the House was seen as a step in the right direction. US inflation reached its lowest level since April 2021, with core inflation also experiencing a slight decline. These developments raised hopes that the Federal Reserve's interest rate hiking cycle may soon come to an end, providing a boost to the markets.

Asian equities faced declines in May, influenced by uncertainty surrounding the US debt ceiling and concerns about China's economic recovery. Performance varied among individual countries, with some faring better than others. The tech-heavy markets of Korea and Taiwan posted positive gains, buoyed by global enthusiasm for artificial intelligence (AI). Tech stocks also contributed to the overall performance of Indian markets, where all sectors, except utilities, experienced gains. In China, there were signs of moderating growth as economic data fell below expectations, and reports of new Covid-19 infections added to domestic uncertainties.

Emerging market equities declined in May, impacted by concerns over the US debt ceiling and China's economic recovery. All regions ended the month with negative results, with Central & Eastern Europe, Middle East, and Africa (CEEMEA) lagging the most. Underperformance in CEEMEA was driven by Saudi Arabia, the United Arab Emirates, and South Africa. Sentiment dampened for the latter as reports emerged alleging arms sales to Russia. In Latin America, only Brazil recorded gains as its unemployment rate reached the lowest level in seven years. Weakness in China weighed on Asian equities, with disappointing economic data from April and indications of moderating economic growth.

Overall, fixed income markets saw losses in May, although there were gains in certain areas, particularly Continental Europe. UK gilts experienced the most significant decline, followed by US treasuries. German bunds saw marginal gains. Disappointing annual inflation data, exceeding consensus estimates, was the primary reason for the underperformance of UK gilts. The Bank of England had already implemented a 0.25% interest rate hike, with further increases expected later in the year. Investment-grade bonds also faced challenges in May, given their sensitivity to interest rate movements. Both the US and Sterling corporate indexes declined. High-yield bonds had a mixed performance, with the US index falling and the euro currency seeing marginal gains.

In May, European shares ended lower as concerns about a global economic slowdown and uncertainty surrounding the US debt ceiling outweighed positive signs of easing inflation. Among sectors, only information technology made a positive contribution, while real estate, energy, and communication services performed poorly.

Eurozone inflation fell to its lowest level since February 2022, dropping from 7.0% to 6.1% in May. Core inflation also declined from 5.6% to 5.3%, surpassing consensus estimates. Most eurozone member countries experienced a decline in inflation, with the exception of the Netherlands.

Despite the decline in inflation, European Central Bank (ECB) president Christine Lagarde emphasized the need for more interest rate hikes, citing persistently high inflation. Germany's revised GDP figures showed a contraction of 0.3% for the first quarter, pushing the country into a technical recession. The decline was driven by reduced household consumption due to high inflation and rising interest rates. The International Monetary Fund (IMF) expects Germany's economy to shrink by 0.1% in 2023.

The flash purchasing managers' composite index (PMI) for the eurozone fell to 53.3 in May, the first decline since October 2022. The gap between manufacturing and services widened, with manufacturing below 50 and services above, indicating a divergence in performance.

In political news, Spain's prime minister called for a snap general election in July following defeats for the Socialist party in local and regional elections. The outcome of the general election is likely to result in a coalition between the Partido Popular and Vox.

In the UK, the equity market closed lower in May due to an increase in core inflation to a 31-year high. This raised expectations of further interest rate hikes by the Bank of England (BoE), which had already raised rates to the highest level since 2008 at 4.5%. The BoE now projects that inflation will not reach its target of 2% until the beginning of 2025. The GDP grew by 0.1% in the first quarter, and the BoE expects the economy to stagnate in the first half of the year before picking up in the second half.

UK retail sales increased by 0.5% in April, rebounding from a revised 1.2% decline in March. The rise was attributed to improved weather conditions and increased government benefits. The GfK index of consumer confidence rose for the fourth consecutive month, reaching its highest level since February 2022. The IMF no longer predicts a recession for the UK in 2023 but anticipates inflation to remain above 2% until mid-2025.

In the US, stock markets had a mixed month, with the S&P 500 and Nasdaq ending higher while the Dow Jones declined. The Nasdaq, driven by AI-related stocks like Nvidia, performed well. The House of Representatives passed a bill to raise the US debt ceiling, reducing the risk of a default. The Federal Reserve raised its benchmark interest rate by 0.25% but indicated a potential pause in monetary tightening due to tight credit conditions and their impact on economic activity and the labour market. US inflation eased to its lowest level since April 2021, and strong jobs growth indicated a robust labour market.

Asian equity markets declined in May due to uncertainties surrounding the US debt ceiling and concerns about China's economic recovery. However, performance varied across countries. Taiwan and Korea experienced healthy gains led by the technology sector, driven by optimism about AI. Indian markets also performed well, with technology and consumer-related sectors leading the way. Japanese equities reached a post-bubble high, driven by overcoming deflation, a weaker yen, and upbeat corporate earnings. Australian technology stocks benefited from a global re-rating, but weakness in financials and materials offset some of the gains. Commodity prices, including Brent crude oil and gold, declined during the month.

In May, global emerging equity markets experienced a decline due to uncertainties surrounding the US debt ceiling and concerns about China's economic recovery. All regions, including CEEMEA (Central & Eastern Europe, Middle East, and Africa), Latin America, and emerging Asia, posted negative returns. However, the technology sector stood out as the only sector to register gains, driven by increased global excitement about the potential of artificial intelligence.

CEEMEA equities performed poorly, particularly in countries such as South Africa, Saudi Arabia, and the UAE. South Africa faced negative sentiment after reports of alleged arms sales to Russia, which could lead to potential sanctions from the US. The country raised interest rates by 0.50% in line with consensus. Additionally, the fall in Brent crude oil prices, down 11.5% to $72 a barrel, had a negative impact on oil-producing nations.

Greece's financial sector led the way as the country extended its rally. Elections were held in May, with New Democracy winning 41% of the vote but falling short of an overall majority. A snap parliamentary election is scheduled for June 25. In Turkey, President Erdogan secured another five-year term after defeating opponent Kemal Kılıcdaroglu with 52% of the vote. However, Turkish equities finished lower along with the lira.

Among Latin American countries, Brazil was the only one to deliver positive returns. Favourable macroeconomic data, including a decline in the unemployment rate to its lowest level in seven years, boosted retail sales. The main interest rate (Selic) remained unchanged at 13.75%. In Mexico, despite strong domestic demand data, equity prices drifted lower as several reform attempts by President Lopez Obrador were invalidated by the Supreme Court. Colombia experienced political uncertainties, resulting in the weakest performance in the region.

Asian equity markets were hindered by weakness in China. Economic growth showed signs of moderation, and April's data fell below expectations. However, factory activity rebounded in May, with the Caixin manufacturing Purchasing Managers' Index indicating growth. Domestic headwinds were compounded by reports of a new wave of Covid-19 infections. Taiwan and Korea experienced healthy equity gains, driven by optimism surrounding the artificial intelligence theme. India also saw strong performance in technology and consumer-related sectors, while other sectors, except utilities, finished positively.

In the bond markets, overall performance was negative, although continental Europe, particularly Germany, managed to rally toward the end of May. UK gilts suffered the most significant decline, down 3.79%, in response to higher-than-expected annual inflation data of 8.7%. This raised expectations of more frequent interest rate hikes by the Bank of England, with a projected peak rate of 5.35% by year-end. The US Federal Reserve increased interest rates by 25 basis points, reaching the highest level since 2007, but signalled that this might be the last rate hike in the current cycle. Continued strength in the labour market and persistent core inflation tempered hopes of a pause in rate hikes. A deal on the US debt ceiling was eventually reached, reducing uncertainty.

The European Central Bank also raised interest rates by 25 basis points and indicated further rate increases. However, sovereign bonds in the region rallied toward the end of the month as inflation figures came in weaker than expected, leading to a re-evaluation of future rate hike expectations. Germany experienced a recession following two consecutive quarters of negative growth.

In the bond market, sterling and dollar-denominated investment-grade bonds faced negative performance due to interest rate sensitivity. Both the ICE BofA US Corporate Index and the ICE BofA Sterling Corporate Index declined. Euro credit fared relatively better, with the ICE BofA Euro Corporate Index gaining ground, although investment-grade credit spreads widened. High-yield bonds had mixed performance, with the ICE BofA US High Yield Index declining, while the ICE BofA European Currency Index returned marginally positive gains.