by Tim Sharp
Global equities had a strong May gaining 4.2% after losing 3% in April with US markets once more leading the way as markets turned “risk-on” largely driven by positive corporate earnings. Technology was the strongest sector up approximately 8% and the “Magnificent 7” gained 10%[i] with the main catalyst being Nvidia with another set of outstanding results. Energy, Autos, and Travel were the weakest sectors as energy and discretionary sectors underperformed. US equities gained 4.8% while Europe added 2.6%, and a weaker dollar assisted emerging market equities to a positive result, +1.95%.
Following the release of the results for Nvidia, the stock gained 7.8% in after hours trading which equates to an increase in market capitalisation of approximately $182 billion[ii]. At a capitalisation of $2.7 trillion it remains marginally smaller than Apple and Microsoft and represents 5.8% of the S&P500. In recent history Nvidia has led the market direction, however, its good fortune failed to lift the wider market on this occasion. There is a disconnect between the reported results of the big seven and the wider market leading to total index earnings rising 7% in the US and falling 5% in Europe although earnings were actually expected to fall 10%.[iii]
The correlation between stocks and bonds turned positive in the month with global bonds gaining 0.9% in dollar termsiii. Gilts were buoyed by weaker inflation due to the changes in the energy bill price cap and positive comments for the prospect of lower rates in late summer. Despite, guidance from European Central Bankers that policy rates were likely to be cut in June, this likely move has been well flaggedi, and we believe largely priced in to markets thereby leaving European government bonds flat on the month. In line with “risk-on” credit markets were positive and spreads tightened marginally with many investors we see attracted to the overall yield on bonds instead of being put off by historically tight spreads available in main markets.
The prospect that developed economies have reached peak rates and most will be looking to cut this year has added a tailwind to listed property (+3%) and infrastructure (+6%) where we feel valuations have reached very attractive levels in certain sectors.
Central bankers and, therefore, investors continue to be data dependent as they look to forecast the future path of interest rates. The US Personal Consumption Expenditure Report (PCE) is the Fed’s preferred inflation gauge, and it reported a 0.3% gain in April as expected while the core rate was +0.2%. This will do little to guide markets so we will look towards the next round of central bank meetings in June to provide any change to perceptions. Currently the ECB is likely to move in June, we see markets currently pricing in a move in the UK in August and only 2 cuts in the US later in the year. Investors will scrutinize the press releases following the June FOMC meeting for clues as to the Feds views on inflation and the economy with some economists predicting the first cut in September.
After much speculation, UK Prime Minister Rishi Sunak called the date of the UK General Election as July 4, 2024, even though the Labour Party looks to have a 20-point lead leaving the Conservatives with an uphill task to win a majority. Both the major parties are looking to convince financial markets of their fiscal prudence with commitments not to raise income tax, corporation tax, or National Insurance which will severely limit any new government’s flexibility to tackle problems seen within the NHS or immigration. The UK still has a very tight labour market and a low participation rate since the pandemic compared to other developed economies and plans to increase competitiveness and convince markets that they are pro-business will be an important policy exchange during campaigning. Consumer and business confidence remains low despite high savings rates perhaps pointing to a lack of stability in recent times with five changes of primes minister during the last fourteen years. Perhaps a prolonged period of stability following the election result will support a recovery in the UK economy and UK financial markets.
[i] Ward_Murphy _ Zara _ Absolute Strategy Research _ Investment Committee Briefing _ June 3, 2024
[ii] Authers _ John _ Bloomberg Opinion _ Points of Return _ May 23, 2024
[iii] CIO Office _ Edmond de Rothschild _ Monthly Market review _ May 2024
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