May Issue 2022
Summary
Global equity markets continue to be unsettled. In addition to broader declines, May saw weaker-than-expected earnings from US consumer bellwethers, Target and Walmart. The news brought down shares across Consumer Staples, one of the few more-resilient sectors year-to-date.
Equity Snapshot
| United States | • | US equities continued their weak trend for much of May. The S&P 500 Index briefly entered an official bear market, having fallen 20% from its peak in early-January, before a late-month rally helped the index close the month with flat returns. In contrast, the tech-heavy Nasdaq, which was already trading in bear-market territory, continued to decline, reaching its lowest level since late-2020. Despite some downbeat guidance from several high-profile companies, in general, first-quarter earnings have beaten forecasts. Approximately 90% of S&P 500 companies have reported first-quarter results so far, with around 80% topping expectations, according to FactSet. |
| • | The Fed raised the federal funds rate by 50 basis points (bps), its first increase of that magnitude since 2000, and signalled that it would raise rates by the same amount in both June and July. Fed chair, Jay Powell, ruled out a 75-bps increase but warned that bringing inflation down to its official 2% target will cause “some pain”. There appears to be a growing swell of opinion that the US Federal Reserve may have to engineer a short period of negative growth to take the heat out of the US economy. | |
| Europe | • | European equities closed May little changed (in EUR terms): while eurozone markets generally advanced, overall European returns were dragged down by weak results in non-eurozone markets, Switzerland and Denmark. Stronger-than-expected economic data for May and robust corporate earnings growth, particularly in the energy sector, helped to lift sentiment. The first cracks in Europe’s hitherto united response to Russia’s armed force invasion of Ukraine started to appear, but EU nations eventually agreed to ban the majority of Russian oil imports. The European Commission also announced a EUR 300 billion REPowerEU Plan aimed at ending the EU’s dependence on Russian fossil fuels and tackling the climate crisis through a green transformation. |
| • | Early estimates for eurozone service sector activity were unexpectedly positive in May. S&P Global purchasing managers’ index (PMI) recorded the second-strongest expansion in the services sector in the past eight months, helped by a rebound in tourism and recreation as economies relaxed pandemic-related restrictions. In contrast, manufacturing activity expanded at the slowest pace since November 2020 as supply shortages weighed on output. The EU cut its forecast for 2022 eurozone GDP growth to 2.7% from an earlier estimate of 4.0%, but raised its inflation estimate to 6.1% from 3.5%. | |
| Asia | • | Equity markets in Asia delivered mixed returns in the month of May. Despite concerns over the outlook for the global economy and a more hawkish tone from many central banks, some of the markets were supported by the improving sentiment as China started to ease pandemic-related restrictions in Shanghai and Beijing. With such a backdrop, China and Hong Kong equities ended the month in positive territory. Developed markets, such as Taiwan and Korea, also managed to reverse the negative performance towards the end of May. Australia was slightly down as the Reserve Bank of Australia raised rates by 25 basis points. Within ASEAN, Philippines and Thailand equities posted gains while Indonesia and Malaysia were down for the month as commodity prices retreated. |
| Bond | • | It was a volatile month for global bonds. Yields initially spiked higher as central banks turned more hawkish given rampant inflationary pressures. The 10-year US Treasury yield reached a peak of 3.2%, while the 10-year German Bund yield neared 1.2%, its highest level in seven years. While US bonds closed the month with positive returns as yields subsequently fell, European bond returns were negative as yields remained elevated. On the policy front, the Fed raised the federal funds rate by 50 basis points (bps), its first increase of that magnitude since 2000, and signalled that it would raise rates by the same amount in both June and July. ECB president Christine Lagarde has called for gradual rate increases following the end of the ECB’s bond-buying programme in early July, but other policymakers are suggesting that larger moves may be needed. |
| Outlook | • | Global equity markets continue to be unsettled. In addition to broader declines, May saw weaker-than-expected earnings from US consumer bellwethers, Target and Walmart. The news brought down shares across Consumer Staples, one of the few more-resilient sectors year-to-date. For flighty investors who fled growthier names in Q1, it reinforces the feeling that there is nowhere left to hide. |
| • | Yet the shift is, to some extent, the logical consequence of forces that drove the Q1 market rotation. Markets expected higher interest rates due to sustained inflation. While central banks have started tightening monetary policy, it is nowhere near the rate required to curb inflation rates that have reached a 40-year high of 9% in the UK and 8.3% in the US. As a result, the cost of living is rising and companies dependent on variable consumer spending face a less predictable outlook. | |
| • | Equally, interest rates are expected to continue rising. Federal Reserve minutes confirmed the market should still expect 50bps hikes at each of the next two meetings, while the European Central Bank has effectively committed to two 25bps rate hikes this summer, bringing rates back up to zero. Thus, central banks hope to engineer a “soft landing” for the economy, and with unemployment levels still near record lows, there is hope that this may still be achieved. | |
| • | As this drives up the cost of debt, share prices remain volatile. Global growth is already decelerating, while Russia’s drawn-out war and persistent supply chain issues in China amplify negative sentiment. Companies not able to beat and raise earnings meaningfully are thus getting short shrift from the market, with Growth stocks in particular facing mechanical pressure from rising discount rates. | |
| • | In this environment, the appeal of cyclical stocks is clear. Previously cheap shares are reporting short-term earnings growth at record highs, driving sharp rallies. However, with performance so tightly linked to an unpredictable economic cycle, we prefer instead to focus on proven businesses. In these select quality companies with sustainable growth prospects, valuations are increasingly compelling. Staying this course can be a challenge in periods when markets are so short-term in nature, but our ability to do this has served us well in the past and underpins our long-term track record. | |
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June Issue 2022
Summary
Global equity markets continue to be unsettled. To some, June’s modest rotation away from Energy stocks – until now this year’s winners – marks a turning point.