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May Market Update – pain continues for many asset classes

For financial professionals only

In a nutshell:

  • Fed hiked base rates by 0.5% for the first time since 2000, with more to come
  • Cost of living squeeze tightened in the UK, as CPI hit 9%
  • Most asset classes fell over the month, with some positive exception

What’s moving markets…

May was a continuation of April, with the Ukraine war and Chinese lockdowns ongoing.

Energy prices continued rising and WTI crude oil prices rallied by more than 11% during the month, a staggering increase of over 70% year to date. This helped drive US inflation to 4.9% over 12 months to April 2022 (as measured in May by the core Personal Consumption Expenditure Price Index). Inflation reached 7.5% in the EU and 9% in the UK, the highest level since 1982. Central banks have a tough challenge of managing inflation while avoiding a “hard landing”. This may be easier in the US, where inflation is falling and growth expectations are higher, while the EU and UK still struggle with rising inflation and a lower growth outlook. During the World Economic Forum in Davos the Head of the International Monetary Fund (IMF) declined to rule out a recession, noting the “horizon has darkened” for the global economy.

Against this gloomy backdrop, it’s unsurprising sentiment among investors is poor. Bank of America’s survey of 331 fund managers in May 2022 found average cash balances reached a 20-year high of over 6%, in preparation for challenges ahead.

But it’s not all negative. While consumers and companies face higher costs, economic data remains robust in many quarters. US factory production is still strong, while retail sales and card spending are solid. Jobless claims are low, as are credit card and mortgage delinquencies. While consumer savings ratios in the US and UK have fallen over the last year, they remain broadly in line with long-term averages. Overall, corporates and consumers still look relatively healthy.

Asset class implications…

It was another negative month for many equity and bond markets. Energy performed best in the FTSE All World Index, gaining over 11% over May, driven by rising oil prices. Saudi oil company Aramco became the most valuable company in the world during May, overtaking Apple, which has struggled so far this year from rising interest rates and supply chain disruption in China. Alternative energy was the second best performing sector in global equity markets, with tobacco and banks also gaining value. However, many other sectors fell in May, particularly consumer services and mining.

On a regional level, UK, European and Japanese equities all saw modest positive returns, while the US, Asia and Emerging Markets were all negative.

Bond returns were generally negative as yields rose over the month. Expected rate rises in the US led to continuing strength in the dollar. Goldman Sachs say the currency has appreciated to the 96th percentile over the past two decades.

Within alternatives, property was marginally up over May, with infrastructure broadly flat.

Overall, it remains uncertain how quickly inflation will fall and whether we can avoid global recession.

Asset classes in numbers

Name 1m 3m YTD 1yr 3yr
FTSE Actuaries UK Conventional Gilts All Stocks TR in GB -2.97 -7.71 -12.47 -11.36 -8.12
ICE BofA Global Broad Market Hedge GBP TR in GB -0.16 -2.34 -4.87 -2.57 -5.65
IA UK Direct Property TR in GB 0.65 3.12 4.57 12.33 9.07
FTSE All Share TR in GB 0.69 2.31 1.50 8.27 18.44
FTSE USA TR in GB -0.57 -0.02 -7.61 9.67 54.43
FTSE World Europe ex UK GTR in GB 0.18 0.48 -8.55 -1.46 27.19
FTSE Japan TR in GB 1.17 -1.98 -6.57 -2.59 15.55
FTSE Asia Pacific ex Japan TR in GB -0.46 0.76 -3.21 -6.87 22.94
FTSE Emerging TR in GB -0.39 -1.15 -3.53 -6.58 16.92

Source: FE Analytics, GBP total return (%) to last month end