World Market Review May 2023

Rocky economic data and sticky UK inflation kept markets jittery over May. There were positive signs as we entered June, with some strong jobs numbers and the agreement of a debt ceiling deal in Washington. Globally, there was an unusual divergence between services and manufacturing, with buoyant retail figures but manufacturing survey data pointing to industrial contraction in the UK, US, and EU.

The FTSE dropped after the UK’s latest inflation data was badly received by investors. The headline rate of inflation dropped from 10.1% to 8.7%, but this was above expectations of 8.2%. More concerning still was that “core” inflation (stripped of volatile components such as energy) accelerated from 6.2% to 6.8%; its highest rate since 1992. Markets subsequently priced in further rate hikes from the Bank of England, sending 10 year gilt yields up from 3.7% to 4.2%.

Meanwhile, UK house prices saw their first year-on-year fall in value since 2012 as the cost of living and soaring mortgage costs started to take their toll. By Nationwide’s numbers the average price is down more than 3%, and over 10% after inflation.

The fall in stocks, bonds, and property shows the value of genuine alternatives; the physical gold in our defensive fund delivered a positive return in May.

In America the economic headlines were dominated by wrangling over the debt ceiling, but the stock market in New York was unfazed, partly thanks to strong data on jobs, housebuilding, and car sales. With the debt ceiling agreement now signed, the Treasury will embark on a $1 trillion borrowing spree to replenish its cash balance, flooding the market with short-dated debt. This could put temporary pressure on bond prices, but experience in 2008 and 2020 shows that the market can absorb large-scale issuance.

Returns on the US stock market have narrowed significantly in recent months, with the largest ten names in the S&P 500 accounting for nearly all of the index’s returns in 2023 so far. This was partly thanks to the big tech giants posting strong earnings, plus hopes of an AI goldrush; Nvidia has risen over 175% year-to-date, taking it into the elite $1 trillion valuation club. The chipmaker is the fourth-largest holding in our US tracker fund, helping the fund buck the negative global market to rise 2%.

There were early signs of disinflation on the continent, with sharp declines in the annual inflation rate in Spain, France, and Germany, helping euro bonds deliver some of the few positive returns on bond markets. European stocks dropped in May, partly due to a lack of technology stocks in the indices, but Europe remains one of the best performing regions year-to-date. Despite the tough month, our Montanaro European fund managed to outperform the index by over 1%.

Credit default swaps on Turkish government debt – which act as insurance against default – spiked after Erdogan won re-election, but have since returned to normal on investor optimism that the administration will adopt a more orthodox economic policy post-election. Elsewhere, economists warned governments in emerging markets such as Colombia and Hungary not to cut rates prematurely.

Chinese macro data cooled after the red-hot expansion following the lifting of Covid restrictions. The decline in the property market accelerated, with investment falling 6.2% in the latest figures.

The Japanese economy posted positive growth in the last quarter, taking it out of a technical recession. The expansion was fuelled by household spending and tourism, and the news took the Tokyo stock market close to its 1989 peak. However, the important export and manufacturing sectors remained weak. We have a large weighting to Japan, which helped boost portfolios in May.

The debt ceiling agreement removed the most obvious near-term obstacle for investors, but plenty of risks remain. Markets are pricing in rates to peak later this year and then ease downwards. If inflation remains stickier than anticipated, central banks will be forced to keep rates higher. The rising level of core inflation – which strips out volatile components like energy – is particularly worrying, because it could indicate the beginnings of a wage-price spiral.