May’s muted negative performance numbers belie the rollercoaster experienced in world stock markets over the month. Investor sentiment plunged to its lowest level in 30 years, but the market rallied in the last few days to undo much of the fall. Looking below the surface, we see a continuation of 2022’s familiar themes: bonds and growth stocks down, small-cap stocks down even sharper, and value stocks holding up better. This has been driven by central banks hiking rates to try and keep the lid on inflation.


UK economic data for May looked contradictory. On the one hand unemployment fell to its lowest since 1974, and wages roses sharply. On the other, inflation rose relentlessly to 9% (with economists predicting it to top out in double digits later this year) and consumer confidence plunged to its lowest reading on record; worst than during the financial crisis.

In response to the inflation, the Bank of England hiked rates from 0.75% to 1%, their highest level since 2009. The FTSE has been relatively immune to the rate-induced market falls, thanks to its plethora of bank, insurance, and short-duration oil stocks, and ended May up about +1%. We captured this performance with our Fidelity UK fund.


Similar patterns are playing out in the US, where the Federal Reserve raised rates by 0.5%, the largest single raise since 2000. The market is now pricing in two further 0.5% hikes in June and July. Fed chair Jay Powell initially adopted a hawkish stance, saying he would accept a rise in unemployment if it was the price of containing inflation. As worries over economic growth grew, the Fed’s messaging softened somewhat.

America’s stock market has grown remarkably over the last decade, and today is about 50% larger than the rest of the world’s stock markets combined. The growth was driven by investor appetite for “Big Tech” – Microsoft, Apple, Alphabet, and the like. Big Tech’s rise has been helped by low interest rates, which make future profit growth more valuable. However, this means America’s markets have been uniquely vulnerable as rates have risen. The Nasdaq index of high tech companies dropped 23% in the first five months of the year. By contrast, a globally diversified sterling investor (such as in CPN’s Global Equity portfolio) would be down about 10%.


European consumer confidence rose in May, albeit from a low level, and business surveys were relatively strong. This should give room for EU policymakers to begin tightening policy to cool Eurozone inflation, which rose to 8.1%. ECB chief Christine Lagarde hinted the bank would begin hiking rates in July, along with an end to asset purchases by September and an exit of negative rates by October. Despite a tough month for European markets, our Lightman fund bucked the trend and posted a positive +3% gain.


Several Chinese cities, including the financial centre, Shanghai, spent May under lockdown, as Omicron rippled through the population. The lockdowns have suppressed economic activity and compounded supply chain problems, fuelling inflation in China and its export markets. Most cities have begun to reopen, but Beijing and Tiajin are both tightening restrictions. Optimism over reopening helped our new T Rowe China fund rise to be our top performer of the month, gaining over 4%.

Emerging Markets, in general, have borne the brunt of the higher food and fuel prices stemming from the war in Ukraine. The inflation in the West is also indirectly causing problems; emerging markets often borrow money in dollars and see the repayments rise with a stronger greenback. Our Emerging Market bond fund trounced the wider bond market in May, thanks to expectations that developing countries would stave off rate hikes to support growth.


Japanese inflation rose to 2.1%, which is high for Japan but low compared to the UK or US. BOJ governor Haruhiko Kuroda vowed to continue ultra-loose monetary policy, saying Japan doesn’t face the same trade-off between growth and inflation as Western economies. That policy has weakened the Yen, providing a boon to Japan’s big consumer goods exporters, but higher global rates have taken the wind out of some of Japan’s growthier domestic stocks.


The year to date has been painful for investors of all risk appetites, as rising rates hit both stocks and bonds.

However, the recent turbulence is evidence that diversification across asset classes, regions, equity styles, and currencies does lead to lower volatility and higher returns over the long run.

For example, our new RAFI tracker weights holdings by fundamental factors like cash flow, which leads to a shorter duration “value” equity style that provides resilience during rising rates; the RAFI fund rose 3% in May, while many stock markets were negative.

By combining styles (such as value) investors can earn superior risk-adjusted returns.