Today's economic and political picture offers plenty of reasons for gloom. Inflation has accelerated to an all-time high in the major developed economies, oil is close to $120 a barrel and we can probably expect chunky interest rate rises from the US Federal Reserve and other central banks through the summer and possibly the autumn too. Then there is the official start of ‘quantitative tightening’ as the Fed starts to unwind its pile of bonds acquired during the easing conditions of the pandemic.
Given this troubling backdrop, most areas of the equity and bond markets around the world have recorded declines in double digits year to date. May’s fund and sector trends largely continued those of preceding months, though moves were shallower and towards the end of the month equity markets did show some strength in the face of poor news. In the US, the S&P 500 bounced just over 9% from its recent low. A bear market rally or a sign perhaps that better times lie ahead?
Light at the end of the tunnel
There is certainly a growing sense that markets may now be discounting the worst. Fund managers and other market participants have been exceptionally downbeat lately, taking the lowest amount of risk since the 2008/2009 financial crisis. The fact that many participants are running up cash in anticipation of volatile times is, ironically, an encouraging sign. The fact there weren’t any additional aggressive statements arising from the release of the Fed minutes this month also gave investors some comfort.
Another light at the end of the tunnel has emerged in China where there has been a reduction in Covid cases, a reopening in Shanghai following stringent lockdowns and easing conditions in Beijing. The government has announced a wide range of support measures, loosened social restrictions for businesses and households and initiated a raft of tax credits to encourage spending, investment and job retention. This should add a significant level of economic demand back to the global marketplace and there has consequently been a bounce in Chinese equities.
Chinese demand for energy could add to the pressure on energy prices as the discussion continues among EU members about extending sanctions on Russia to include oil. Energy heavy funds continued to perform well over the month as investors took a more sanguine view of long term oil and gas prices or looked to hedge against escalating inflation from raw materials.
Despite some early signs that inflation is peaking in the US, giving investors hope that the path of interest rates may not be as aggressive as previously feared, we're not out of the woods, particularly in the UK where inflation seems to be persistently stubborn. A cocktail of high labour costs and retirements across the labour force and rising commodity and energy costs continues to pressure companies.
Global stock markets are therefore not expected to regain significant ground until improvement is seen in various issues, including the war in Ukraine and the economic bottlenecks in China. Investors also need to be confident the peak in inflation has passed and the risk of an enduring period of economically damaging stagflation has receded. It remains the case that the actions of central banks are likely to be the major determinant of market performance this year now the interest-rate cycle has turned.
The technology sector continued to bear the brunt of market weakness because higher interest rates reduce the value that investors place on future earnings. This hits companies where the valuation today depends on longer-term growth and future cash flows. Outlook statements from mega-cap tech businesses such as Apple and Amazon have also disappointed. The oft-lamented lack of major technology businesses in the FTSE 100 has, however, meant that the UK market has outperformed.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for May 2022 in full:
Top 10 funds:
Bottom 10 funds:
Top 10 sectors:
Bottom 10 sectors:
Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for May 2022: 30/04/2022 to 31/05/2022. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into over 40 ‘sectors’, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds
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