Surging growth and inflation were the dominant themes in May. Growth figures have been exceptional, driven by economies reopening and continued government stimulus. Resurgent demand caused bottlenecks down supply chains, driving prices upwards. Inflation measures were further amplified by the base effect of weak prices during the lockdown a year ago. The inflation looks transient so far, but we remain watchful of economic data that could indicate a secular shift.
The OECD revised upwards its growth forecasts for the UK this year to +7.2%, the highest in the G7. The labour market was also robust, with the unemployment rate dipping to 4.8%. The good news helped sterling strengthen steadily, with the pound rising 3% to $1.42. It might seem surprising that the FTSE’s performance was muted, but this was down to higher interest rates and the stronger pound. At CPN we remain bullish on UK stocks, especially domestic-focussed ones, which should benefit from the reopening economy and cheaper valuations than elsewhere.
US inflation rose to 4.2%, the highest reading since 2008. There were also signs of inflationary wage pressure, with small businesses claiming they are struggling to fill positions. Our Jupiter Gold & Silver fund was well-placed to benefit from the resultant inflation fears, and jumped 10% in May, following 11% gains in April.
Meanwhile, corporate profits boomed; aggregate earnings across the S&P 500 smashed expectations with 47% growth. The Federal Reserve kept its economic forecasts unchanged, easing fears of a rapid tightening. Nevertheless, the prospect of eventual rate hikes weighed on markets, and despite the earnings growth the S&P rose less than 1%.
It is less than four months until Germany’s federal election, when chancellor Angela Merkel is standing down after 16 years. Her centre-right CDU party has a chance of holding onto government, but voters seem jaded after its decades in power. The CDU is jostling for first place with the Greens, led by the charismatic Annalena Baerbock. A Green-led government may sound bad for Germany’s manufacturing sector, but as the ruling party in Baden-Württemberg (the heartland of Germany’s car industry) the Greens have shown they can work well with big business.
Europe delivered the strongest performance of all the major stock markets, buoyed by the continent’s vaccine catch-up. Our Lightman European fund managed to beat the index, partly thanks to its largest holding Deutsche Bank, which has risen by over one-third this year so far.
In Mumbai, the stock market rose after Prime Minister Modi refused calls from opposition parties to put India into lockdown. One of our Aviva GEM fund’s top stocks is Indian energy giant Reliance Industries, which rose 10%.
Beijing is cracking down on some of China’s homegrown tech companies. Delivery giant Meituan became the second to face an antitrust probe, after Alibaba in April. Afterwards, Meituan’s CEO posted an old Chinese poem on social media, which was seen as a shot at President Xi Jinping, sending shares down sharply. Our Matthews China Smaller Companies fund helps to diversify towards smaller, domestic-focussed companies, which face no antitrust threat.
The Japanese government is pressing ahead with the delayed Olympics, but is facing calls from sponsors to delay for a second time. The sponsors – mostly Japanese conglomerates like Toyota – worry that their money will generate meagre returns if the games are held without spectators. We reduced our Japanese exposure in April, which proved a good move after Tokyo delivered the weakest performance of the major markets in May.
We leave you with a thought from California, where the 90-year-old investor Warren Buffet hosted Berkshire Hathaway’s annual meeting. Buffett warned that “wonderful” technologies can change the world, but are not necessarily good for investors. As an example, he took the optimism around the car industry in the early 1900s: “There were at least 2,000 companies that entered the auto business because it clearly had this incredible future… and by 2009, there were three left, two of which went bankrupt.” Starry-eyed investors were correct that the car would change the world, but left disappointed with their returns. At CPN we strive to find investments that offer attractive risk-adjusted returns and avoid glamorous areas that, for investors, have poorer prospects.