The old adage to “sell in May and go away” didn’t hold up in 2024, as stocks and bonds delivered positive returns in the month. The gains were driven by expectations that the inflation path would enable central banks to start cutting rates this year. There was divergence within markets, with small-cap and growth stocks leading the pack, while emerging market stocks lagged.

UK OUTLOOK

The FTSE 100 reached a record high in the month, just short of 8,500, helping make the UK the top performing region of the month. However, the best performance came down in the small-cap space, as optimism that the Bank of England would start cutting rates this year provided a boost to valuations. Our Amundi small-cap fund fully captured this upside, rising over 5% to be the top performer of the month.

The looming election is dominating news headlines, but anticipated fiscal policies will already be priced into asset values. Markets like certainty, and the only an unexpected result would cause turmoil. The calling of the election wiped out hopes of a June rate cut by the Bank of England, because it wouldn’t want to be seen as interfering.

UNITED STATES

Strong earnings reports from Alphabet, Apple, Microsoft, and Nvidia helped propel the S&P 500 to record highs. Nvidia’s valuation topped $3 trillion for the first time, surpassing Apple to become the world’s second-largest stock. The dollar edged down to about 79p, trimming returns for sterling-based investors. Our hedged US fund removed the headwind to deliver the full dollar gain.

Leading indicators pointed to a slowdown in the US economy, with estimated growth rates coming down from 4.8%, to 3.4%, to 1.3%, over the last three quarters. President Biden announced tariffs on Chinese-built electric cars and batteries, in a pre-election move to protect US jobs, but the tariffs will also increase costs for consumers and businesses.

EUROPE

Europe’s economy seems to be reaccelerating after a period of sluggish growth and contraction. The service sector led the way, with PMI data showing robust expansion. Our small-cap UBS Europe fund captured the uptick best, rising 4% in the month.

Data shows US companies are flocking to European bond markets to raise debt at lower rates than in America. These so-called “Reverse Yankee” deals topped €30 billion so far this year, with big deals from giants like Johnson & Johnson. The trend will likely continue, as we saw the ECB cut rates to 3.75% in early June, widening the gap versus the US and UK.

EMERGING MARKETS

Chinese stocks initially bounced in May, driven by a resurgent services sector and optimism of a more pro-business attitude from Beijing. However, ongoing woes in the property sector resurfaced mid-month, and dragged the market back down, with the property sector itself entering a technical bear market after shares dropped more than 20%.

Indian stocks, which had been riding high on strong economic growth, plunged after incumbent prime minister Narendra Modi failed to win an outright majority in the country’s election. However, it looks like he will be able to put together a functioning coalition, and markets largely recovered. Meanwhile, gold surged to a record high after Iran’s president died in a helicopter crash, bringing risks of further instability in the febrile region.

JAPAN

After surging earlier this year, Japan’s market was subdued in May, as investor enthusiasm seems to have calmed. Meanwhile, 10-year Japanese government bond yields rose to above 1%, in anticipation of an expected rate rise by the Bank of Japan in the autumn.

SUMMARY

Inflation will be the pivotal factor driving markets – as it has been for the last few years. Our base case is that lower inflation (and bumpy growth) will push down bond yields and lead to successive interest rate cuts by western central banks over the remainder of the year. Such an environment should be positive for stocks and bonds, though weaker growth could hit valuations.