The month of May saw further advances for financial markets, with both equities and fixed income delivering further gains. The key support for this success was the French election, which passed with a victory for centrist candidate Emmanuel Macron. This victory for the pro-European politician sparked a strong rally among European assets and the euro.
Utilities, technology and consumer staples were the biggest beneficiaries
The strength in Europe helped push developed market equities ahead of emerging markets in aggregate through May.
French equities unsurprisingly rallied, although the returns were in line with Germany and behind the peripheral members including Greece, Italy and Portugal. Outside of Europe, almost every major global market also delivered positive returns.
In a change from prior months, the U.S. was one of the weaker markets. As the U.S. market continues to test record highs, a Donald Trump impeachment threat combined with a subtle turning of data momentum. This saw large-caps modestly increase while small-caps slipped over the month. The U.K. saw a similar theme of large-cap strength, with the calling of a snap election ignored and the FTSE 100 performing strongly.
Utilities, technology and consumer staples were the biggest beneficiaries at a sector level. Meanwhile, energy suffered following the decision by OPEC members only to extend existing output cuts rather than reduce production further. Despite increased volatility, the US dollar held its ground against sterling but fell more than 3% against the euro and 1% against the Chinese yuan.
Within fixed income, similar themes transpired. European fixed income was the standout for the month as political uncertainty at the start of the month led investors to shelter in the safety of sovereigns, despite the low yields. Meanwhile U.S. yields flatlined. Nominal bonds also generally outperformed inflation-protected assets over the month.
In all, this helped multi-asset investors to achieve further gains. Remarkably, we have now witnessed four consecutive months where both equities and bonds have delivered positive returns in US dollar terms, raising issues about the correlation benefits between the asset classes and whether one (or both) of these markets are running in excess of the fundamental baseline.
Past 12 Months in Perspective
If an investor appraises the longer-term results, they should see some clearer developments that cut through much of the short-term noise. The most apparent is that we are well into the midst of a cyclical upswing, with economic data at or near cyclical highs and market prices are reflecting this general sense of optimism.
Despite a slight reversal this month, emerging markets continue to lead the way with total returns in excess of 25% over the past 12 months in US dollar terms up an impressive 41% in sterling terms. Developed markets are also performing exceptionally strongly, with returns in excess of 16% in US dollars and 31% in sterling terms.
Fixed income has been more subdued, with the aggregate index practically flat over 12 months as bond markets stablise at low yield levels. Emerging market debt, up 14%, and high yield debt, up 13%, have been the exceptions, with optimism fuelling the higher risk offerings as spreads narrow relative to government bonds.
If one takes a step back and reflects on these developments, a sense of unsustainability must be acknowledged. Global growth in 2017 is estimated to be just 2.7% according to the World Bank and it therefore seems unsustainable for financial markets to continue its run of strong double-digit returns. Of course, history has showed us that these peculiarities can exist for long periods of time, therefore patience and discipline are required to ensure a behavioural edge is maintained. As always, it is the long-term fundamentals that count.
