The week in review

What’s happened in markets?

The week of 9 May was another eventful week across global markets and on the economic and geopolitical stage.

In the US, the consumer price index (CPI) for April came in ahead of expectations at 8.3% on an annualised basis, more than the 8.1% anticipated, but down from the 8.5% increase recorded in March. This was mainly due to base effects feeding through, with increases in the cost of food, new cars, airline fares and housing being the biggest contributors.

With US consumer prices remaining at a forty-year high, the consensus from a number of Federal Reserve (Fed) speakers, over the week of 9 May, suggested the central bank will take an even tougher stance on interest rates. The expectation is for further 50 basis point hikes in its next meetings in June, July and, possibly, September. The main question remains whether the US central bank can control inflation, without tipping the economy into recession.

The UK is facing similar challenges with the most recent CPI for the 12 months to March up 7.0% (the highest rate since the National Statistics began in January 1997).  The Bank of England governor Andrew Bailey spoke of a “narrow path” towards stabilising prices by raising interest rates, without impacting economic growth. Brexit also returned to the news, as it looks likely UK prime minister Boris Johnson will try to bring forward legislation to unilaterally rewrite parts of the Northern Ireland protocol he signed only 18 months ago.

Meanwhile in Europe, Christine Lagarde, president of the European Central Bank (ECB), signalled that she would support raising the ECB’s base rate in July – the first increase for more than a decade.

The conflict in Ukraine continued to dominate the headlines, but Monday 9 May also saw Russia’s Victory Day Parade in Moscow, marking the anniversary of the Soviet victory over Nazi Germany in 1945. The event was more muted than expected, with Russia’s leader giving no indication as to whether an escalation or a de-escalation in war efforts was imminent.

On the corporate front, around 90% of the US and 75% of European companies have now reported earnings for the quarter and overall results have been fairly strong, with Europe benefitting from a broader sector mix.

In other news, the Hong Kong Monetary Authority intervened in the currency markets, for the first time since 2019, to stop the HK dollar weakening and to bring it back within the trading band of 7.75 and 7.85 against the US dollar. A reflection of some of the large swings we’ve seen recently across currency markets.

In equity markets, the volatility continued as the news headlines fed through. The more cyclical value stocks (-6.4%) continued to outperform the longer duration growth stocks (-12.7%), albeit seeing general weakness. In terms of style, both small capitalisation stocks (-10.0%) and large capitalisation stocks (-9.4%) were down. The performance of developed markets (-9.3%) and emerging markets (-10.1%) over the short term was almost identical, but developed markets were more in favour over the longer term. All sectors were in negative territory over the last 30 days, but energy (-0.5%) continued to lead the way. Despite fluctuating and falling back slightly over the shorter term, energy was up more than 30% over the last 12 months. Although crude oil has fallen back to about US$110 a barrel, it remains at hugely elevated levels. The worst sector performer over the last 30 days was the cyclically exposed consumer discretionary (-14.0%). Within fixed income markets, lower grade credit has pulled back given the unsettled market backdrop. Finally, the US dollar, being a safe haven asset, remains in favour due to the risk off environment.

What’s happened in portfolios?

We still believe equities is a broadly favourable environment, despite the continued market volatility, and our value bias has helped relative equity performance in the portfolios.

In fixed income markets, we retain our short duration bias which has been beneficial for performance, but we are looking for more opportunities to gradually add duration and reintroduce some interest rate risk into the portfolios. The week of 9 May saw some huge swings in yield on the 10-year US Treasury bonds, which rose as high as 3.20% before closing the week at 2.93%.

Against this ongoing volatility, we continue to champion real assets and alternative strategies – areas where we can get diversification within our risk exposure, pick up attractive yields, even with rising rates, and build in some inflation protection.

In terms of real assets, there was good news from 3i Infrastructure, our direct infrastructure investment trust, which announced strong portfolio performance and released solid year-end results with a 17% return. This performance was broad based across its portfolio, with every asset owned delivering a positive return. Overall, real assets continue to provide vital downside protection.

Alternative Strategies have performed less well. On a month-to-date basis, private equity has pulled back a little given its links to broader public equity markets. However, overall we remain in favour of the asset class with both our private equity holdings performing reasonably well in terms of their net asset value (NAV) growth. We expect a certain level of heightened volatility with private equity investing, but over the longer term this should stabilise and produce decent long-term returns.

What’s happening this week?

17 May • US retail sales | 18 May • UK Consumer Price Index | 18 May • EU Consumer Price Index