Markets were unsettled in May, with the main equity indices outside Europe ending the month in negative territory. Significant volatility returned to cryptocurrency markets, while commodities also experienced larger price swings than seen for many years. Inflation continued to be a strong theme in markets, as several markets posted short-term rises, combined with strong economic figures and low unemployment.
US equities were the worst performers in the month, as the MSCI USA index ended down 2.17%. The US posted its strongest surge in inflation since September 2008, as a rally in commodities, a rebounding economy, and pressured supply chains combined to increase prices. The Federal Reserve signaled last August that it would allow inflation to run above its previously stated target of 2%. Economists theorise that this serves two purposes: firstly to erode the value of outstanding debt taken on during Covid, and secondly to combat the threat of Japanese-style deflation. To keep the figures in perspective, the 10-year breakeven inflation rate (a common marker of inflation expectations) is 2.5%, only marginally above its level from 2017-19. In the first G7 meeting under President Biden, the US along with the other G7 nations agreed in principle to a global corporation tax rate of at least 15%.
Asia Pacific Equities performed poorly in May, as the MSCI Asia ex-Japan index declined 1.41%. The region was under strain from a resurgence of Coronavirus, with countries previously thought to have defeated the virus such as Vietnam and Taiwan experiencing new spikes. India continued to see record rises in case numbers, hampering the country’s economy and providing a political stumbling block for Narendra Modi’s government. The administration is putting together a stimulus plan aimed at sectors that have been hardest hit by the pandemic. Up to 5kg of food will be provided to the poorest, many of whom are rural-to-urban migrant labourers without work in the lockdowns.
In China, a state-owned asset manager, Huarong, was in the spotlight, as potential bond defaults at the company threatened to impact the wider financial system. If the company defaults, all eyes will be on Beijing, as overseas investors will want to see whether the Chinese government underwrites the losses or allows the company to fail. Additionally, China’s industrial recovery was hampered by rising commodities prices, leading the Producer Price Index, a measure of goods leaving Chinese factories, to rise 6.8% in April, year on year. As a result, the department responsible for economic planning issued a warning on ‘speculation’ in the iron ore market, leading the price and several associated commodities to fall sharply. As inflationary pressures rose, the Renminbi also rose, making exports less attractive.
European stocks performed strongly in May, as the MSCI Europe Index rose 1.51%. This was in part driven by a relative difference in valuations between European and US equities, with the latter at higher multiples and therefore benefitting less from reopening. In Europe, bond yields also rose, following the US higher since the start of the year. Coupled with stronger economic data from the continent, this raises the question for the European Central Bank as to when they should phase out their pandemic bond buying programme. However, towards the end of the month, European Central Bank officials struck a dovish tone, with executive board member Fabio Panetta suggesting now was not the right time to slow the asset purchases. Elsewhere, the EU threatened to sue AstraZeneca if it did not fulfil its vaccine contract, arguing in a Belgian court that the company did not make ‘best efforts’ to supply the agreed number of doses.
UK Equities also recorded a good month in May, as the MSCI UK indices rose 1.31%. UK house prices continued to rise in a strong start to the year, with the largest increases witnessed outside London and the South East. With this and increased savings during the pandemic, UK household wealth has powered to a record £11.4tn in 2021, having added almost £1tn in the past year. Whether this accumulated wealth will be retained or spent is a key question, but strong retail sales since lockdown point to a release of pent-up savings in the economy, which should have a stimulative effect.
The MSCI Japan index declined 1.08% in May. Japan’s economy continued to struggle under the weight of Covid-19, as quarterly national output declined 1.3% in the first quarter and 5.1% annually. With already weak inflation figures and the slowest vaccine rollout among developed nations, Japan is expected to rebound less strongly than peers. The Tokyo Olympics is also in jeopardy again, this time due to the slow vaccine rollout. The big Japanese sponsors backing the Games have also called for a postponement to the Games amid concern over the value of their marketing campaigns in an environment where 80% of the public want the Games to be delayed or cancelled.
In May the primary theme in markets was again inflation, as commodities tapered their strong performance towards the end of the month and several monetary authorities shifted their positions towards controlling rising prices. Cantab is actively monitoring inflation and believes that the phenomenon is best analysed over a long timeframe. Nevertheless, staying abreast of these periods of inflation is important, and can inform on market trends. We maintain a multi-year time horizon on all our investments and use a variety of managers and investment styles to ensure our portfolios are resilient in different market conditions.
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.