What’s happened in markets?

FTSE All Share -0.19 -3.19 -1.31 -1.43 5.52 4.13 3.61
Euro Stoxx 50 -1.03 -4.50 -8.30 -12.87 -5.55 5.83 3.64
S&P 500 -3.00 -12.38 -9.95 -17.67 -4.87 13.01 12.35
Japan Topix 0.71 -1.97 -1.25 -4.61 1.39 9.02 6.19
MSCI Asia Pac. 3.56 -3.96 -14.71 -15.59 -21.60 4.58 4.18
MSCI Emerg. Mkts. 3.13 -5.36 -15.41 -15.36 -20.10 4.07 3.48
Jo’burg All Shares -1.57 -8.32 -9.68 -6.37 7.25 10.76 8.16
UK Gov’t Bonds -1.41 -0.08 -6.00 -10.03 -8.04 -1.34 -0.16
US Gov’t Bonds 0.73 -0.06 -5.22 -8.09 -6.88 0.36 1.00
Global Corp. Bonds 0.20 -1.58 -6.67 -11.03 -9.41 0.63 1.84
Emerg. Mkt. Local 2.38 -3.62 -11.27 -10.42 -14.40 -1.50 -0.26
Figures in the respective local currencies as at the end of trading on 20/05/2022.

Markets continue to be negative and volatile with the same protagonists in play: high inflation, fears over central bank tightening and, more recently, concerns over slowing growth. Meanwhile, in the background, concerns continue over the ongoing Russia-Ukraine conflict and the global effects of China’s zero-covid policy.

Data coming out of the US on Thursday 19 May showed signs of a slowdown of activity in the US economy. Existing home sales fell to the lowest level since June 2020 to an annualised rate of 5.61 million, below the 5.64 million expected. House prices are still strong, but we have seen a big increase in mortgage rates as the key 30-year rate has moved up from 3.5% to 5.5% this year, reflecting the Federal Reserve’s (Fed) actions to reduce demand and cool the economy.

In the UK, consumer price inflation for April hit a 40-year high at 9% – up from 7% in March, but slightly less than the 9.1% expected. This was driven by higher fuel and food costs, and the accompanying cost of living crisis. It was also revealed that there are more job vacancies than unemployed people in the UK for the first time since records began. The unemployment rate for the first quarter was down to 3.7%, its lowest for almost 50 years, while the number of job vacancies rose to a new high of 1,295,000 from February to April 2022. This has created a strange dynamic with a very tight labour market, coupled with rising prices and concerns over the cost of living.  It’s expected this will lead to further monetary tightening from the Bank of England.

Brexit-related tensions continue to simmer between the UK and the EU, as the UK foreign secretary Liz Truss announced plans to unilaterally introduce new legislation relating to the Northern Ireland Protocol – the trade deal which governs how goods enter Northern Ireland from the rest of the UK.

In terms of the euro area, gross domestic product grew 0.3% in the first quarter of 2022, slightly better than the 0.2% expected, and equivalent to 5.1% on a year-on-year basis. While European Central Bank president Christine Lagarde has spoken of a base rate rise in July, Dutch central bank governor Klaas Knot went one step further and raised the prospect of a 50 basis-points hike, if inflation broadens.

It is a rather different inflation story in Japan, where April’s consumer price index hit 2.5%. This is relatively low compared to most of the world, but marks a seven-year high for the country.

Also in stark contrast to the rest of the world, the People’s Bank of China lowered its main mortgage interest rate on Friday 20 May. Against the backdrop of coronavirus lockdowns and worsening economic conditions, it was the largest cut on record for its five-year loan prime rate from 4.6% to 4.45%. The move marks president Xi Jinping’s attempts to stem the decline in economic activity and reinvigorate demand, particularly in the country’s beleaguered property sector.

In terms of corporate news, a focus for the markets was the release of quarterly earnings from two of the biggest US retailers, Target and Walmart, which underperformed expectations by quite a margin. Target reported an earnings per share (EPS) of US$2.19 (below the US$3.07 expected) citing supply chain disruptions and lower than expected sales of discretionary items. Walmart reported an EPS of US$0.74 (against an expectation of US$1.30) citing strong sales, but squeezed profits due to food and fuel cost inflation. This also reflects the cultural shift in discretionary spending post pandemic, as people switch away from material goods to experiences, such as holidays and eating out.

The week of 16 May was another volatile and negative week across global markets. In terms of style, value (-7.9%) continued to outperform growth (-13.3%), while there was little difference in returns between small capitalisation stocks (-10.5%) and large capitalisation stocks (-10.5%). Across the regions, emerging markets (-5.4%) outperformed developed markets (-11.1%) again over the short term, but developed markets remained more in favour over the longer term. The worst performer over the last 30 days was the consumer discretionary sector (-17.4%), which reflected the disappointing earnings from the large retailers on the back of inflation and supply chain issues. The energy sector (+0.3%) continued to be the best performer, edging into positive territory over the last 30 days. Within fixed income, there has been some change recently with high yield (-4.2%) significantly underperforming the broader global bond market over the short term. Government bonds saw a rally in the week of 16 May on the back of concerns over growth.

In terms of currencies, although the US dollar remains strong, given the rhetoric coming out of the Fed, the Japanese yen has stabilised and appreciated slightly, recovering a fraction of its recent losses against the US dollar.

Latest Consensus Forecast
UK GDP (QoQ) 0.8
UK PMI 58.2 56.5
UK CPI (YoY) 9.0
EU GDP (QoQ) 0.3
EU PMI 55.8 55.1
EU CPI (YoY) 7.4
US GDP (QoQ) -1.4 -1.3
US PMI 57.1 57.5
US CPI (YoY) 8.3

What’s happened in portfolios?

In terms of broader strategy, there was no change over the week of 16 May. We retain a preference for risk assets, with a bias towards real assets and alternative strategies given the inflationary environment. We have moderated our views on equities and retain a bias to Europe and underweight US, with a tilt towards value over growth.

Within equities, our emerging market exposure via TT Emerging Markets Equity Fund has seen better performance, as the recent economic stimulus from China has helped to improve sentiment.  Shanghai has also announced that it is gradually reopening and aims to resume normal life again by the middle of June, following its seven-week COVID-19 lockdown.

We remain underweight on fixed income, particularly on duration and government bonds, but, given these levels and the outlook, we are looking to moderate that underweight and increase duration and also the credit quality of the fixed income in expectation of a potential slowdown in growth.  Our government bond exposure performed well and produced a positive return over the month, given the volatile environment and its safe haven status. We also had a positive meeting with the mangers of the Lord Abbett Short Duration Income Fund, which has outperformed due to its shorter duration, overweight to energy and exposure to bank loans.

Under real assets, our renewables holding John Laing Environmental Assets Group (JLEN) released impressive first quarter net asset value (NAV) results, up 14.5%. This was largely on the back of higher power prices (across wind, solar and anaerobic digestion assets), as well as higher inflation and lower discount rates, which are positive for valuations. JLEN will also be joining the FTSE 250 Index, which will improve liquidity.

Our alternative strategies continue to behave as good diversifiers, outperforming the traditional mix of 50% equities and 50% bonds.

What’s happening this week?

24 May • UK Purchasing Managers’ Indexes | 24 May • EU Purchasing Managers’ Indexes | 26 May • US Personal Consumption Expenditure