Market updates from May

In a Nutshell

Global equities ended mostly flat after some significant volatility this month, with the principal factors being the persisting war in Ukraine, central banks seeking to balance growth and inflation, and further growth concerns in China.

RePowerEU

Sadly Russian hostility in Ukraine continued, with no major change arising during Russia’s ‘Victory Day’ as some analysts had expected or hoped for. Instead the fighting continued to focus towards the east of the country, as Europe continued to develop its diplomatic and economic response to the war.

As a part of this the EU revealed its REPowerEU plan, a €300 billion plan to move away from Russian gas & oil, and towards sustainable energy options. While hailed as a way of depriving Putin of energy export revenues, it nevertheless attracted criticism from environment groups as it proposed the EU was likely to use more coal and nuclear power to compensate in the short term.

Inflation reached 8.1% in the Eurozone, increasing pressure on the ECB to increase interest rates by at least 0.5% in July. Despite these headwinds European equities were predominantly flat this month with the MSCI Europe ex-UK increasing 0.05%, indicating many of these factors are already priced in at this stage.

A ‘Soft Landing’

US equities were very volatile this month, although eventually settled to only minor losses, with the S&P 500 only down 1%. Federal Reserve Chair Jerome Powell noted that monetary policy would continue tightening until inflation was more controlled, and increased interest rates by a further 0.50%. This led to a choppy US Treasury yield as bond markets tried to predict the severity of expected further increases over the following few months.

Powell also warned it would be challenging for the Fed to achieve a ‘soft landing’ for the US economy, whereby a recession is avoided while limiting inflation which had raised to 8.3% in April. This was especially in the context of the expected continued slowdowns in Europe and China that would affect global growth.

China’s Mixed Results

Unlike in the West, Chinese inflation remains relatively low, at 2.1% in April, in part due to reduced domestic demand caused by Beijing’s zero-Covid policy. Consequently the People’s Bank of China made moves to cut its five year Loan Prime Rate interest rates from 4.6% to 4.45%, in an attempt to stimulate growth, and in particular shoring up the property sector which has been showing signs of strain.

There were a number of gains in the technology sector this month, with large companies such as Alibaba and Baidu announcing better than expected results, and Covid infections decreasing from its previous peaks. However overall markets remained flat, with PMI data continuing to contract at 49.6, as a result of lockdowns slowing manufacturing output.

Looking Ahead

As our banks, governments, and businesses look to work through this time of heightened inflation and volatility, it is worth remembering that a diversified portfolio with a range of assets is one of the best ways of limiting the impact. Investing should always be thought of as a long term process, with shorter term volatility a good part in why investors are rewarded with attractive long term returns. Remaining invested through periods of volatility is key in meeting one’s financial goals.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.