“A whiff of stagflation” is how one City insider described the recent economic data coming out of the US. GDP growth came in weaker than expected, while inflation ticked up to 3.5%. The implication of higher interest rates and a weaker environment for corporate profit growth sent American stocks lower, with the S&P 500 index clocking its worst month since last September.


The UK was a relative bright spot in the month, helped by its large sector weightings to energy (which benefited from a higher oil price) and banks (which benefitted from higher interest rates). UK economic momentum was also positive, with the PMI survey of businesses showing growth rebounding into positive territory. The main beneficiary was our large-cap L&G UK equity fund, which bucked the market and rose 3%.


After several strong months, the rally in US mega-cap tech stocks abruptly ended. The US has enjoyed strong economic growth in recent years, but this has complicated the inflation and rate situation. The latest figures showed headline inflation ticking up to 3.5%, and core inflation steady at 3.8%, both far above the Federal Reserve’s 2% target.

Fed Chair Jay Powell was keen to downplay fears of a return to 1970s-style stagflation, saying “I don’t see the ‘stag’, I don’t see the ‘flation'”. He stressed that the US economy still looked in far better shape than the rest of the developed world, enjoying “strong growth and a strong labour market, very low unemployment, high job creation, and all of that”. However, he admitted that rates may have to stay higher for longer, with markets dialling back expectations of a rate cut until later in the year.


The declines were mirrored in Europe. The EU’s two most valuable companies, Dutch chipmaker supplier AMSL and Danish health giant Novo Nordisk, were hit hard on earnings day, dropping 7% and 3% respectively. Earnings growth was stellar; the drop was more due to stretched valuations, with both stocks having seen huge run-ups over the last few years.


China was the star performer of the month, as GDP growth surpassed expectations and Beijing continued to stress that it would be supportive of capital markets after almost two years of poor returns. Our Franklin China fund led the way, rising almost 7%.

Other emerging markets were mixed, with India posting a positive return as recent data showed the number of Indians who owned shares has now surpassed the number owning property. Latin America lagged, as the IMF warned that the region’s shifting demographics could impede economic growth. The dispersion largely cancelled itself out, with our India fund rising 3% but our Latin America fund falling 3%.


Japanese stocks gave up some of the gains they had made year-to-date. The gap between Japanese rates and US or European rates continued to put downward pressure on the yen. While a low yen is good for Japanese exporters, it has also contributed to inflation, hurting Japanese domestic demand.


April was an example of why proper diversification is a prerequisite for a long-term portfolio, as the month-to-month dispersion between regions and sectors is unpredictable, and chasing performance of a certain in-vogue asset class usually ends in tears. At CPN we optimise diversification to target the best risk-adjusted returns, and continuously monitor for where adjustment is required.