May’s investment market commentary

In the hope that the worst of the pandemic may now have passed, many countries began to ease lockdown restrictions, and we saw some tentative signs of an improvement in economic activity, albeit from a very low base. However, as the pandemic eased in the US and Europe, COVID-19 cases grew rapidly in a number of significant emerging economies, including Brazil, India, Mexico, South Africa and Russia.

On the political front, tensions between China and most other countries increased, with accusations that it was responsible for creating the virus and concealing its deadly nature. Australia led calls for an independent investigation, with China retaliating with punitive tariffs on some Australian exports. The United States also upped the ante with various trade and sanction threats, which led many to talk of the emergence of a new cold war. Tensions in Hong Kong over new China imposed laws against sedition fanned the flames further, with the US threatening to remove Hong Kong’s special trading status.

Towards the end of the month, the death of George Floyd, while in the custody of the Minneapolis Police Department, saw impassioned protests break out across US cities and beyond, as it reignited the “Black Lives Matter” campaign. With the race for the presidency now in its final six months, Trump’s poor handling of both the pandemic and the racial unrest saw his popularity slump, allowing Democrat nominee Biden to take a meaningful lead in the election polls. While a Biden presidency would probably help ease global political tensions, financial markets would probably not be so welcoming of the change.

European markets were buoyed by the unveiling of a plan from President Macron and Chancellor Merkel for a new jointly funded EU recovery fund that could provide fiscal support to some of the economically weaker countries. If agreed, this would be a significant step towards greater fiscal cooperation across the euro area. Prior to this announcement, Italian government bond yields had been rising as investors worried that the costs of dealing with the pandemic could spark a second euro crisis.

The first quarter corporate earnings season concluded in May, and there was little to cheer as the majority of companies reported falling earnings and a weak outlook for the coming quarters. Even so, some investors took heart that the results were generally better than expected.

Central bank quantitative easing programmes helped ‘oil the wheels’ of financial markets, boosting liquidity and keeping bond yields low. While equity issuance has been relatively modest over recent months, companies have issued near record levels of corporate bonds. This has been partly opportunistic, because interest rates are very low, but it also reflects the need for additional liquidity to help weather the economic crisis.

The recovery of equities continued, with most major markets and sectors delivering gains. Over the month, the MSCI AC World Index rose +6.6% in sterling terms. At the country and regional level, Japan (+8.2%), Europe ex UK (+7.9%) and the US (+7.4%) did well, while the UK (+3.2%), Emerging Markets (+2.9%) and Asia ex Japan (+1.0%) struggled. At the sector level, economically sensitive areas picked up a bit. Information technology (+9.1%) was the top performer, although industrials (+8.4%), materials (+8.2%) and consumer discretionary (+8.1%) also did well. In contrast, real estate (+2.6%), financials (+3.6%) and consumer staples (+4.2%) lagged the average. In terms of style, growth (+8.3%) continued to outpace value (+4.7%), while smaller companies (+8.9%) did better than larger companies (6.6%).

Fixed income markets also took on a more positive tone. While safe haven government bonds saw a slight rise in yield (fall in price), investment grade corporate and high yield bonds clawed back some more of the ground they lost in the late February / March drawdown. Over the month, the JP Morgan Global Government Bond Index slipped -0.2%, while the ICE Merrill Lynch Global Corporate Investment Grade Bond Index rose +1.3%, the ICE Merrill Lynch Global High Yield Bond Index rose +4.5%, and the JP Morgan Global Emerging Market Bond Index advanced +5.7% (all hedged to sterling).

The Bloomberg Commodities Index rose +6.6%, mainly driven by the substantial rebound in crude oil (+52.8%). industrial metals (+5.0%) and gold (+4.9%) also drifted higher, in part because the US dollar gave up ground against most other currencies.

Finally, in the foreign exchange markets the pound was relatively weak, losing ground against most currencies. For example, against the pound the US dollar rose by +1.9%, the euro by +3.3%, the Mexican peso by +10.1%, and the South African rand by +7.1%.