What’s happened in markets?

FTSE All Share 2.64 2.05 1.75 1.17 7.99 5.19 3.93
Euro Stoxx 50 4.40 3.80 -1.77 -9.03 -2.47 7.31 4.55
S&P 500 6.62 -0.43 -4.79 -12.22 0.39 15.59 13.46
Japan Topix 0.53 1.43 1.80 -4.10 1.13 9.40 6.17
MSCI Asia Pac. 0.29 0.48 -10.29 -15.34 -23.03 4.93 3.83
MSCI Emerg. Mkts. 0.91 0.24 -10.29 -14.59 -20.91 4.50 3.22
Jo’burg All Shares 4.32 0.43 -3.77 -2.33 10.51 13.09 9.25
UK Gov’t Bonds -0.69 -2.09 -5.49 -10.66 -9.30 -1.94 -0.43
US Gov’t Bonds 0.30 0.19 -4.62 -7.81 -6.85 0.30 1.06
Global Corp. Bonds 1.04 -0.03 -5.08 -10.10 -8.85 0.92 2.03
Emerg. Mkt. Local 1.68 1.38 -8.12 -8.91 -13.53 -1.18 -0.18
Figures in the respective local currencies as at the end of trading on 27/05/2022.

The week of 23 May saw the UK cost of living crisis hit customer demand. The flash S&P Global/CIPS UK composite purchasing manager index (PMI) fell sharply to a 15-month low of 51.8 in May, down from 58.2 in April and lower than the 56.5 expected. The steepest decline in activity was in the service sector, dropping from 58.9 in April to 51.8. This slump in UK private sector growth takes it to its weakest since the lockdown in winter 2021.  On Thursday 26 May, UK chancellor Rishi Sunak announced a 25% windfall tax on the profits of oil and gas companies, as part of a £15 billion package of support for households struggling to pay for soaring energy bills.

In the US, inflationary pressures continued to weigh on private sector expansion as the flash S&P Global US composite PMI fell to 53.8 in May from 56.0 in April, and lower than the 55.7 expected. The rate of growth was the softest for four months, with the index now below the series long-run average of 54.8. New home sales also underperformed, plunging to their lowest since the start of the pandemic with an annualised figure of 591,000 (against the 749,000 expected). The US Federal Reserve minutes released on 25 May did not deviate from expectations, highlighting the “strong commitment and determination” of policy makers to restore price stability and prepared to raise rates further. US president Biden announced he is considering a review of the tariffs imposed by Trump on imports from China.

In Europe, eurozone growth remained more robust in May despite the headwinds from the Russia-Ukraine war, pandemic supply constraints and a rising cost of living. The flash S&P Eurozone composite PMI fell to 54.9 in May from 55.8 in April. Services posted strong growth as a result of pent-up demand following the easing of pandemic restrictions, especially for tourism and recreation activities. Meanwhile, Hungary’s prime minister, Viktor Orbán, refused to discuss the European Union’s (EU) proposed oil embargo of Russia at the forthcoming EU summit.

On the corporate front, there was mixed news on earnings. US media company Snapchat slashed its profit and revenue forecasts causing a -31% drop in share price, which has been a theme across a number of social media platforms of late. However, upmarket retailer Macy’s and discount retailers Dollar General and Dollar Tree all beat expectations with shares up more than 10% on the day.

In other news, US government data indicated stockpiles of gasoline has fallen to the lowest seasonal level since 2014, fuelling the commodity to rise to a 2-month high.

After the Dow Jones suffered a historically significant decline lasting eight weeks, which was the first time since 1923, the week of 23 May was positive for markets, paring back many of the 30-day losses. Although they remain volatile led by short-term sentiment coming through. In terms of style, value (+0.5%) continued to outperform growth (-5.1%), while performance of small capitalisation (-2.4%) and large capitalisation (-2.1%) stocks remained broadly similar. Developed markets (-2.1%) remained slightly ahead of emerging markets (-2.3%) over the last 30-days, but developed markets remain ahead over the longer term. By sector, energy (+14.2%) remained the best performer, while global property (-8.1%) and consumer discretionary (-8.3%) were still significantly down over the last 30 days. In fixed income, high yield continued to underperform the broader global bond markets, particularly at the longer end, despite an increase in risk appetite.

The broader taste for risk assets that we’ve seen more recently has also resulted in the US dollar taking a breather from its recent strong outperformance.

Latest Consensus Forecast
UK GDP (QoQ) 0.8
UK PMI 51.8
UK CPI (YoY) 9.0
EU GDP (QoQ) 0.3
EU PMI 54.9 54.9
EU CPI (YoY) 7.4
US GDP (QoQ) -1.5
US PMI 57.1 56.5
US CPI (YoY) 8.3 8.2

What’s happened in portfolios?

As the taste for risk assets returns, it has become a more reasonable environment for equities. We have moderated our stance recently with a slight shift in focus to larger capitalisation stocks, over small to medium capitalisation stocks, and those areas which have better margin control and more global access to markets. We have maintained our preference for developed markets, while being mindful of the geopolitical risks we’re currently seeing in Europe and the more persistent inflation in the UK.  As discussed earlier, value continues to be favoured by markets year to date. That bias has been supportive of our equity holdings, in particular Dodge and Cox Global Stock Fund, the passive iShares Edge MSCI World Value and the iShares FTSE 100 UK Dividend Plus, with its indirect tilt to value.

We are moderating our underweight to fixed income with a shift from short duration, long credit risk to take more duration risk (i.e. more interest rate sensitivity) and less credit risk. Rotating slightly out of short duration high yield into longer duration investment grade or treasuries, now that end of the curve is really starting to price in some significant shifts. Our high yield has underperformed the broader market slightly over the short term with spreads starting to widen given the macroeconomic uncertainty. While longer duration has been rewarded, particularly over the last month. However, on a year-to-date basis, the opposite is true where we’ve seen yields increase and spreads tighten which have helped our relative performance within fixed income.

Real assets had an interesting, if volatile, week. There was a slight softness in the renewables sector on Tuesday 24 May on speculation over the UK windfall tax; however, this reversed quickly when it became clear renewable energy was not in the government’s crosshairs.

Finally, under alternative strategies, we took part in the successful Gresham House Energy Storage Fund capital raise, which was heavily oversubscribed and raised £150 million. The fund invests in utility-scale operational energy storage systems, primarily utilising storage batteries across Great Britain, which is a vital area to support the renewable energy sector.

What’s happening this week?

31 May • EU Consumer Price Index | 1 June • UK Manufacturing Purchasing Managers’ Index | 3 June • US Nonfarm Payrolls