5 min read 17 Jun 22
Summary: Investors were hit with another bout of market volatility in May, with global equities just managing to finish in positive territory. The dual forces of slowing growth and runaway inflation are creating an increasingly complex backdrop and doing little to quell the nerves. Investment Specialist, Kirsty Clark reviews recent market performance and comments on the swathe of central bank rate rises in the face of rising inflation.
Equity markets took investors on another rocky ride in May as global growth concerns compounded worries over aggressive central-bank policy tightening to combat rising inflation. A middling month was bookended with a precipitous share-price retreat across all major regional markets in the first week, and a rally in the final week of May. The optimism came amid rising hopes that weaker growth expectations might lead to less aggressive US rate hikes and as China eased COVID restrictions. The late rally helped global equities secure positive returns in the month, with the MSCI AC World Index closing marginally up (total returns in US dollar terms)
Global Value outperformed Growth, defensives outperformed cyclicals, and large caps in aggregate finished ahead of their small-cap counterparts – although small- and mid-caps proved more resilient in the US. Emerging market equities marginally outperformed developed market equities.
Japanese and LatAm equities were the strongest regional performers in May. German, Spanish and Italian equities also performed well. In addition, Chinese onshore equities (Shanghai A shares) and UK large caps (FTSE 100 Index) outperformed in the month.
In the US, despite starting on a stronger note, the tech-heavy Nasdaq was among the weakest performers overall as the tone from the Federal Reserve grew increasingly hawkish, with policymakers indicating a more aggressive tightening trajectory ahead.
At a sector level, energy stocks continued to outperform as oil prices soared, and financials and utilities also logged positive returns. Laggards included consumer-related names, along with IT and healthcare stocks. However, within IT, semiconductors were among the strongest performers.
Source: Refinitiv DataStream, 31 May 2022. Total Returns in USD.
In commodities, Brent crude maintained its upward trajectory, closing the month at around $122/barrel. Year-to-date, it is up close to 60%. Gold was down in May, and the US dollar also weakened over the course of the month (although the greenback has been strengthening so far in June, gaining back the ground lost in May).
It was a mixed month for fixed income. In Europe, increasingly hawkish tones from the ECB weighed on German bunds and Italian government bonds, while UK gilts faltered amid surging inflation. Meanwhile, the prospect of a less aggressive Fed at the beginning of the month saw US Treasuries finish the month in positive territory.
The picture in June has become one of increasingly hawkish central banks in the US, UK and Europe, firmly focused on taming rising inflation. However, sitting alongside ongoing inflation concerns are downside risks to global growth.
This week we saw a 75 basis point (bps) hike from the US Federal Reserve, the largest hike since 1994, deviating from earlier guidance after a higher-than-expected Consumer Price Index (CPI) print last Friday.
The Bank of England’s Monetary Policy Committee also upped interest rates for the fifth consecutive time, by another 25 bps, and warned that it expected inflation to top 11% before the end of the year (higher than OECD forecasts of around 8%). For some, the rate rise didn’t go far enough to tackle rising inflation, despite the dismal outlook for growth, with predictions of more substantial rate rises on the horizon this year.
The UK is expected to see the slowest growth next year of any G20 country after Russia, according to latest OECD figures, and one of the highest rates of inflation among G7 nations until 2024 - fuelled by rising energy, goods and services prices, and exacerbated by the ongoing war in Ukraine, higher taxes and Brexit-related trade barriers.
In Europe, an emergency meeting of the ECB governing council was called on Wednesday, after central bank comments last week, on winding down its bond-buying programme and instating future rate rises, spooked investors. The ECB pledged to use its firepower and introduce a new policy tool to combat any ‘fragmentation’ in the bloc – referring to the widening gap in the cost of borrowing between core eurozone economies such as Germany, and more vulnerable peripheral members including Italy. The move came after Italian sovereign bond yields topped 4%.
There was also a surprise move from the Swiss National Bank, raising rates by 50 bps yesterday (or rather reducing negative interest rates). It’s the first rate rise for 15 years.
Perhaps less surprising, the Bank of Japan stayed the course – sticking to its ultra-loose monetary policy and leaving rates unchanged for now. Inflation has risen in Japan, but remains close to the central bank’s 2% price stability target.
While central banks remain preoccupied with getting inflation under control, deflationary factors are raising concerns about the prospects for global growth. Notably, we’ve seen early signs of waning consumer demand amid rising costs and negative real wage growth, along with falling Purchasing Managers Indices (PMIs) and weakening consumer confidence data.
An unwelcome combination of slowing growth and potential monetary policy error make it increasingly challenging to navigate a soft landing and avoid recession. According to a June survey conducted by the Financial Times and the University of Chicago’s Booth School of Business, 70% of leading academic economists expect the US to enter recession next year, while growth is expected to slow to a halt for the UK economy in 2023.
At a road junction, ‘anything but a tie’ is naturally the preferred outcome. But with inflation and growth approaching in opposite directions, a meeting somewhere in the middle could be just the reset the global economy needs.
 Source: Financial times. Available at https://www.ft.com/content/6dea82f3-59ea-4736-a0db-b808f08bab6a
 Source: OECD: https://data.oecd.org/gdp/real-gdp-forecast.htm#indicator-chart
 Source: Consensus Economics, Financial times. Available at https://www.ft.com/content/4f55f312-6478-4920-a911-ac023ae006aa
 Source: Financial times. Available at https://www.ft.com/content/53fcbbf1-39e3-483c-a6f2-b0de432ed5a3
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.