Market updates from May

In a Nutshell

In May, The BoE raised interest rates and revised growth and inflation forecasts upward signalling confidence in the country's economic prospects. In Europe, ECB's move to raise interest rates shows a proactive approach to managing inflation. Lastly, government bond yields increased globally, this is a good sign as it reflects market adjustments and continuous assessment of economic conditions.

UK Economy

UK equities experienced a decline with noticeable weakness seen in diversified energy and basic material companies due to a broad-based drop in commodity prices. The technology sector was the only one to deliver positive returns, while financials also performed relatively well, supported by the stability of the banking sector.

The high inflation figures led to an increase in yield, causing UK government bonds (Gilts) to perform poorly and ending the month as the worst-performing government bond market.

Bank of England raised the base rate for the 12th consecutive time, increasing it by 25 basis points from 4.25% to 4.5%. The BoE also revised its growth and inflation forecasts upward. The Office for National Statistics (ONS) confirmed that the UK economy grew by 0.1% in the first quarter of 2023, reinforcing the belief that the nation would avoid a recession this year.

April’s inflation report was not received well by investors. Although the headline CPI decreased from 10.1% to 8.7% year-on-year, it exceeded expectations of 8.2%. However core inflation, which excluded volatile items such as food and energy, increased compared to March, reaching 6.8%, the highest level since 1992. This data fueled expectations of a rise in UK interest rates, as it was widely acknowledged that BoE needed to take action to address the inflationary pressures.

US Economy

Across the pond, US equities also faced difficulties in making progress as different sectors experienced varied returns. Although economic data remained positive, investors were concerned about the potential government default.

As expected the Federal Reserve raised interest rates by 25 basis points. The labour market in the US remained tight, the unemployment rate dropping to 3.4%. Inflation as measured by the consumer price index (CPI) increased by 0.4% in April, both overall and excluding food and energy categories.

While the Fed’s rate hike was anticipated, there was a noteworthy adjustment in their messaging. The central bank expressed uncertainty about future policy tightening and emphasised the importance of maintaining flexibility.

Debt ceiling discussions were a key focus during the month. Democrats and Republicans reached a compromise on the final weekend of May to raise the country’s borrowing limit, pending approval from Congress.

Eurozone

Eurozone equities faced a period of weakness following a generally positive performance earlier in the year. The MSCI EMU index recorded a return of -2.5%, with all sectors experiencing declines except for information technology, which was supported by semiconductor stocks. The optimistic sales projections from US chipmakers highlighted the growth potential of artificial intelligence (AI) and bolstered the technology sector.

Eurostat data revealed that the euro area's annual inflation rate rose to 7.0% in April 2023, up from 6.9% in March. In response, the European Central Bank (ECB) raised all three of its key interest rates by an additional 0.25%.

However, there were positive indications of easing price pressures in preliminary data for May. Germany, along with several other countries, reported a decrease in inflation, with a drop to 6.3% in May compared to 7.6% in April. This fostered hope that the Eurozone's rate hikes might soon come to a halt.

Asia

The Asian equity market had substantial declines, especially in Hong Kong and China which offset the share price gains observed in South Korea, Taiwan, and India.

Hong Kong experienced the largest drop among the index markets, closely followed by China. The initial investor optimism that emerged earlier in the year, following the reopening of China's economy after the Covid-19 crisis, waned due to disappointing economic data and weakening demand. China's economic recovery has been slower than anticipated by analysts, with the latest factory activity reading falling below the threshold that signifies growth. Additionally, service sector activity, although still positive, expanded at its slowest pace in four months in May. Share prices also declined in Thailand, Singapore, and Indonesia during the month.

On the other hand, Taiwan emerged as the top-performing index market, primarily driven by gains in technology stocks as investors rushed to invest in AI-related shares. The enthusiasm for artificial intelligence also elevated share prices in South Korea, resulting in positive territory for the month. India stocks also achieved modest gains in May, buoyed by encouraging economic data that improved sentiment towards the country.

Global Bonds

Government bond yields generally increased across the markets. The US Federal Reserve raised interest rates for the 10th time in just over a year, bringing the Fed funds rate to its highest level since August 2007. The Bank of England and European Central Bank also raised rates. The ECB announced its plan to end reinvestments under its Asset Purchase Programme from July 2023, while acknowledging inflation risks.

The UK bond market has a weaker performance than US and EU primarily because of higher than anticipated inflation, which could potentially lead the BoE to maintain higher interest rates for a longer period compared to other developed economies. UK policy makers remain concerned about the tight labour market and the resulting wage pressures. On the other hand, the eurozone received positive news towards the end of the month, as some regional inflation data came in much lower than expected.

Looking ahead

Despite uncertain economic conditions for 2023 , there are reasons for investors to be optimistic in June and beyond. S&P500 has been up by at least 8% on the 100th trading day of the calendar year, the index has averaged a 10% additional gain for the remainder of the year. Sticking to a robust financial plan and diversifying investments can ensure you’re able to weather market volatility.

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.