Fears of persistent inflation and the shifting stance of central banks weighed down global stock markets in May, resulting in relatively modest returns in European markets and losses in the US equity market over the month. Returns were reduced by the relative weakness of the euro and the US dollar to sterling which, in the case of the US, translated local currency gains into losses for sterling-based investors.
However, the global vaccine roll-out programme and the associated reduction of both new infections and fatalities allowed some developed economies to re-open. In the UK, mid-May saw pubs, restaurants and non-essential retailers opening their doors, providing a much-needed boost to the economy.
In Europe, where the vaccination programme has stepped up a gear after a slow start, there was a similar uptick in business activity. During the period, the Investment Association (IA) UK All Companies sector returned an average of just under 1.6%, while the IA Europe Ex UK sector average just exceeded 1.6%.
In the US, higher-than-expected inflation fuelled by pent-up consumer demand and supply restraints, stoked concerns that the US Federal Reserve would be forced to increase interest rates sooner rather than later.
Meanwhile, a strong rise in the pound versus the US dollar and Japanese yen overwhelmed local currency returns when translated back into sterling. This meant the IA North America sector recorded an average loss of just under 2%.
Despite the weakness of the US dollar, which generally provides a strong tailwind for emerging markets, the IA Global Emerging Markets sector average retreated marginally in May, falling 0.7% over the month. The IA China/Greater China sector fell an average of 0.5% for the month. This was, in the main, driven by slow growth in its factory sector caused by the increasing cost of materials and pandemic-induced strains on the country’s relations with its overseas partners.
The bond market showed some signs of life towards the end of the period as positive employment figures from some developed economies helped push bond yields higher (and prices lower). The 10-year US Treasury bond yield edged up in the final few days of May, reaching its highest level since mid-April, as the US posted better-than-expected unemployment figures. Over the month, however, there was little noticeable change.
Elsewhere, the Bank of England confirmed that while its existing programme of £150bn of UK government bond purchases remained unchanged, the pace of these purchases would now be slowed somewhat. However, it stressed that the change was an operational decision rather than a change in the stance of monetary policy, noting that it will continue to monitor the situation and “take whatever action is necessary to achieve its remit”. The IA UK Gilts sector delivered an average return of 0.2% in the month.
May continued the solid start to the second quarter with a month of positive absolute performance for the Caerus Select Portfolios.
Equity markets were mixed, particularly in sterling terms, with Europe especially enjoying a good month as it made the most out of the bounce from a pick-up in the vaccine rollout after a lacklustre start. Fixed-income markets were marginally positive, which added to headline returns for the portfolios.
The developed market equity component of the portfolio was well ahead of the index. This was primarily attributable to the Blackrock Gold & General Fund, which had another stellar month with a return of 8.8% on the back of strong gains for gold and silver.
Elsewhere, Europe was also a bright spot as restrictions eased and companies recorded strong earnings. The Janus Henderson European Selected Opportunities Fund was ahead of its regional index aided by consumer discretionary stocks and an underweight exposure to the IT sector, which had a poorer month.
Other holdings that posted positive returns included the Fidelity Asia Opportunities; Schroder European; Fidelity European; Schroder Tokyo and Quilter Investors Natural Resources (Janus Henderson) funds.
Laggards through May included the Invesco Asian Fund, which underperformed both the regional benchmark and global index as industrial and communication services names were detrimental to performance. The Quilter Investors US Equity Growth Fund, managed by JPMorgan, also had a tougher month as healthcare stocks detracted from returns.
Elsewhere, the emerging market equity component of the portfolio was ahead of the index although flat in terms of absolute performance. The Artemis Global Emerging Markets and Schroder Global Emerging Markets funds both had an excellent month more than offsetting the weakness from the Janus Henderson China Opportunities Fund, which was the worst performer on an absolute basis as Chinese stocks were particularly weak over the month, especially tech stocks, as tightening regulations in China undermined confidence among investors. Meanwhile, the UK element of the portfolio outperformed and was one of the stronger regions thanks to an improved outlook and increasing confidence in the re-opening of the economy.
The Blackrock UK Equity Fund was the only holding in the UK space to register a loss. It was held back by a reversal in the performance of its stock selection across multiple sectors, giving back some of the gains it earned in April when it was a top contributor to performance.
Other laggards included the Liontrust Special Situations and LF Lindsell Train UK Equity funds, which despite being positive were behind the index. However, the Threadneedle UK Equity Income; Quilter Investors UK Equity (Jupiter); Artemis UK Special Situations; Artemis Income, and the Investec UK Alpha funds all outperformed over the month.
The alternatives basket of holdings made a solid gain in the month. The Jupiter Global Equity Absolute Return (GEAR) Fund continued its exceptional year to date this time returning 2.7% for the month. Meanwhile, the PIMCO Dynamic and Janus Henderson Absolute Return Bond funds also contributed positively to the portfolio and offsetting weakness from the Allianz Fixed Income Macro Fund, which posted a loss in May.
The fixed-income basket of the portfolio was positive although it did lag slightly behind its comparator. All holdings made ground in the month, albeit modestly, as fixed-income markets saw little change with the Fidelity Strategic Bond Fund ahead of the pack with a return of 0.3%.
As we move toward the summer we are still grappling with the ongoing details of economic reopening, improving employment trends and inflation numbers against the current variants, vaccine rollout and efficacy rates and peoples willingness to spend/travel after the initial endorphin rush of leaving their own house. The impact that these variables will have on the future direction of markets is important and it would seem that the current premise of most market participants is that “it’ll be alright on the night”. Naturally when we have enjoyed significant returns from certain assets and there remains some uncertainty it would seem wise to take profits and await opportunities to redeploy capital.
Within the next month we have the G7 summit, the next meeting of the Federal Reserve and a decision about further unlocking of our home economy to decipher and will look to understand the impact on any new policies or policy shifts that are announced at these meetings.
There has been some significant coverage about economic cycles and where we are and what comes next. My expectation is for bouts of heightened volatility as we move through the second half of the year and continue to analyse for emerging risks and opportunities that can be exploited through active management rather than broad market participation.