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Navigating a bumpy road

Bumpy road

For financial professionals only

May was a generally positive month for financial markets, continuing the recovery which began in April.

The numbers of COVID19 cases reduced in many countries, enabling a cautious easing of lockdowns.  China is the furthest into this journey, with driving volumes, housing activity and coal consumption all getting back to pre-COVID19 levels. Europe and the US also saw increased driving and housing activity, and the return of spending in bars and restaurants in a small way.


Equities rise

Against this improving economic backdrop, all the major regional equity markets rose in value.

From a regional perspective, Japan and the Europe ex UK equities led the pack, each returning 8.2% over May (FTSE regional indices in sterling).  In the case of Japan, markets were buoyed by a gigantic central bank stimulus: the 117 trillion yen announced in April was doubled to 234 trillion yen in May.  This brings the overall support to a whopping c.$2trillion, or around 40% of Japan’s gross domestic product.

In the US, the Federal Reserve’s balance sheet burgeoned to an historic high of over $7trillion, as a result of the huge economic support measures in place (shown in the chart below, source: federalreserve.gov).  In response, the US stock market rallied 7.2% over May (FTSE USA, in sterling).

Market Commentary May

Global small cap equities rallied strongly, outperforming larger companies, with a return of 8.7% (FTSE Global Small Cap in sterling).

Within industrial sectors, the standout performers for May were alternative energy and support services, each returning more than 12% (FTSE World indices in sterling).  On the other hand, Real Estate Investment Trusts, tobacco, telecoms, banks and life insurance companies all struggled as global interest rates were slashed as part of the central bank policy response to COVID19.  However, life insurance was the only sector to fall in value over the month, the other sectors all posted gains.

Equity market volatility, as measured by the VIX index, continued its downward trend since peaking in March, although volatility remains above pre-crisis levels.


Fixed income remains positive

The UK gilt yield didn’t move materially over May, giving a flat return for fixed interest gilts.

Meanwhile, UK long term market implied inflation increased by 0.3% p.a., which resulted in positive returns for index-linked gilts (+4.7%, FTSE all stocks index).

Credit spreads continued to narrow from their levels seen in March, although remain higher than a year ago.  There was a modest positive return for UK corporate bonds over May.


Other assets begin to move

The UK property market started to re-awaken, as estate agents were allowed to reopen from the middle of the May, and property viewings and surveyor inspections resumed.  However, the retail and leisure sectors in particular were very challenged, while shops, hotels and restaurants remained closed. Bricks and mortar commercial property funds remain suspended.

There was some movement in exchange rates within the month, however, Sterling ended May at broadly the same level relative to the US dollar, euro and yen as it had started the month.

There was a strong rebound in oil prices:  the WTI index increased by nearly 90% over May, although from a low base, and so remains down around 40% over a year. The rally was caused by a sharp reduction in supply as OPEC agreed production cuts, coupled with increased demand from increased road and air traffic.


Our cautious optimism continues

The easing of lockdowns will be gradual and global GDP growth for Q2 2020 is expected to be very poor, potentially 20-30% p.a. lower than 2019.  In the US, jobless claims reached 40 million, although analysts suggest that only around 25% of this unemployment will be permanent.

We cannot discount the risk of a second wave of coronavirus infections, but there are other geopolitical risks which threaten the market recovery.  Chief among these is the fragility of the relationship between US and China, and a re-escalation of trade tensions.  The tragic murder of George Floyd has sparked riots across the US, and the Hong Kong security law passed by China is another source of unrest.  Against this backdrop, we are now less than 6 months from the US Presidential election.

This being said, we are cautiously positive with regards to investment opportunities.  The global economy is tentatively continuing on the path towards normalisation and growth.  If investors remain disciplined and keep a well-diversified portfolio, it should be possible to ride the market recovery, while navigating bumps in the road.



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