May 2 0 2 4 • I S S U E 41

May Markets

Developed market equities had a strong month in May delivering overall returns of 4.5%. Global bonds also performed well, with expectations of rate cuts in developed markets before the end of the year remaining, the asset class was up 1.3% over the month. In terms of commodities, gold was up 0.95%, while Brent Crude oil was down 2.03% over the last month.

In the US, the Dow Jones Industrial Average and S&P 500 produced strong gains of 2.30% and 4.80% respectively over the last month. Strong earnings reports bolstered the belief that recent equity gains are backed by fundamentals. For the first quarter of 2024, 78% of constituents of the S&P 500 beat their earnings per share (EPS) estimates. On the inflation front, the market reacted positively to headline inflation not coming in higher than expected for the first time this year at 3.4% year-over-year (YoY) for April, down from 3.5%. Core inflation, which excludes the volatile food and energy prices, also came in as expected at 3.6%, down from 3.8%. On the fixed income front, US Federal Reserve (Fed) chairman Jerome Powell pushed back against emerging talk of another rate hike. This helped US two, and ten-year Treasury yields fall 0.17% and 0.19% respectively.

UK equities were up 2.40% for the month. Notably, headline inflation in the UK fell significantly to 2.3% YoY for April, down from 3.2% previously but slightly higher than the 2.1% that was expected. A large proportion of this fall is attributed to declining energy prices which have moderated the inflation threat in the region. Core inflation did not experience as large of a fall, coming in at 3.9% YoY for April, down from 4.2% but higher than the 3.6% expected. Some believe that a June rate cut by the Bank of England (BoE) is possible, with seemingly slightly more market participants leaning towards the cut rather coming in August.

In Japan, equities returned 1.2% for the month. Over the past year, the equity market in the region has benefitted from factors such as improving economic prospects, global supply chain shifts, and significant corporate governance reforms. On the other hand, and contrary to its developed market counterparts, the Bank of Japan (BoJ) might deem it necessary to hike rates in order to strengthen a weak Yen. An export-heavy equity market would usually respond positively to a weakening currency, which has somewhat been the case, but this is also starting to weigh on consumer sentiment in the region. The BoJ, therefore, could view rate hikes as necessary to strengthen the Yen and avoid the negative consequences weak consumer sentiment could have on the economy.

In China, a slight downward move in the equity market was seen after strong momentum in previous months, declining 0.6% over May. While export growth has been strong a continued weakness in demand and persisting issues in the property sector tempered the Chinese equity market rally during May. A major focus for investors now is key government policy meetings coming up in July. These meetings could potentially kick start another wave of government support aimed at boosting the economy. Elsewhere in Asia, the Indian equity market was quiet with key election results due in early June, up 0.7% for the month. Asia Ex-Japan as a whole produced robust performance, up 1.6% for the month, boosted by strong performance in Taiwan and Korea. Emerging market equities globally underperformed their developed market counterparts, returning 0.6% overall for the month.

May was a month in which data showed corporate fundamentals remaining strong. Other key data, as well as the narrative coming from key economic players, leads one to believe we are still on course for the expected rate cuts during the remainder of the year in major developed regions. It is important that investors watch key data not only in the context of whether it is rising or falling but also how it comes in relative to expectations.

Eurozone Update

The Eurozone is expected to be the first developed region to see rate cuts in the current cycle, with a 25-basis point cut priced in for June. The potential cut is being viewed as highly probable by the market. Considering the European Central Bank’s (ECBs) monetary policy meeting on the 6th of June, this may have already been delivered at the time of reading.

The equity market in the region performed well during May, with Europe ex-UK equities up 3.60% over the last month. General recovery in the region has also been further supported by the Manufacturing Purchasing Manager’s Index. This is a monthly score derived from surveys of product managers within the Manufacturing Sector, where a score below 50 indicates business contraction and above 50 indicates business expansion. May’s manufacturing PMI came in at 47.3, still in contractionary territory but significantly up from the 45.7 measured previously. The region also saw higher economic growth than expected during the first quarter of this year. Gross Domestic Product (GDP) increased by 0.3% when a 0.1% increase was expected, and the economy shrunk by 0.1% during the previous quarter.

As previously mentioned, the Eurozone has been ahead of the game with regards to the fight against inflation. Headline inflation came in unchanged at 2.4% year-over-year (YoY) for April, while core inflation came in at 2.7% YoY, down from 2.9%. These are lower than the equivalent numbers from the US of 3.4% for headline and 3.6% for core inflation. However, it is important that these numbers be seen in context. While there are strong signs of economic recovery, the lower inflation in the Eurozone has seemingly been accompanied by harder-hit economic growth in the region, as compared to the US. While the region fell into a technical recession last year, the International Monetary Fund (IMF) forecasts growth of 2.7% in the US this year while it expects the Eurozone to grow by only 0.8%. This signals a degree of economic recovery but not growth of the same level as the US.

Lower Growth and lower inflation have meant that the ECB is likely to cut rates in June. While the cut itself is highly expected and won’t come as a shock to market participants, there are still key considerations surrounding the situation the Eurozone finds itself in. One such consideration is how the ECBs rate path will look after the first rate cut in June. Some believe that further rate cuts will come in September and December, while others believe another cut in July is not completely off the table. Analysts believe ECB President, Christine Lagarde, will not give much away at the bank’s June meeting. The narrative from the meeting is expected to be the persisting one of emphasising the bank being data dependent.

Another key factor believed to be linked to the pace and degree of rate cuts the ECB will deliver is the pace of wage growth in the region. Negotiated wage growth rose in the first quarter from 4.5% YoY to 4.7% YoY.

While this data is not expected to affect the likely June rate cut, it has been consistently emphasised by the ECB as a key data point it considers before implementing further rate cuts. The ECB is therefore likely to look for signs of wage growth slowing before cutting rates further after the June cut.

Investors will be watching the movements of key data points as well as the actions of the ECB closely in coming months. While watching market data and the actions of key economic players is important, it is essential that this does not allow investors to be distracted from their long-term investing goals. Being swayed by short-term market movements and economic events has the potential to negatively impact portfolio performance over the long-run.