In what proved to be a volatile month for stocks, the MSCI All Country World Index, a broad measure of global equity markets, fell sharply before rallying to end the month 0.2% higher. Lingering supply chain issues and excessive levels of inflation, spurred by soaring energy costs, continue to plague economies and the rate hiking actions seen by central banks maintains, if not increases, the level of uncertainty in equity markets.
The term “rollercoaster” is overly used to describe stock markets but in the case of last month the term is certainly appropriate. The year-to-date down trend in equity markets continued into May with many bourses falling 5% or more before staging a strong recovery to end the month in positive territory or close thereto.
The fall in equity markets during May, specifically the S&P 500 Index, which can be considered a broad measure of US equities, meant that the US had technically entered into a “bear” market having fallen more than 20% from its recent highs. The ensuing recovery in US stock prices, which led the S&P 500 Index to end the month 0.1% higher, meant that the current stay in bear market territory was short-lived which may lead one to question whether the recovery seen was merely a rally in a bear market or that we have now seen the worst.
Much of that debate will be centred around interest rates and how high they will go. For the first time in more than two decades, the US Federal Reserve (“Fed”) announced a 50-basis point increase in interest rates (typically the Fed has adopted a 25-basis point increment). While this particular change was widely anticipated, the Fed chairman, Jerome Powell, signalled that the Fed would likely implement rate increases of 50-basis points at its next two meetings while also noting that the Fed was not considering a 75-basis point increase. Following the announcement, interest rates edged higher with the 10-Year US Treasury yield rising above 3.0% for the first time in nearly four years before peaking at 3.2%.
Economic data points released during May as well as disappointing financial results reported during the month by certain retail bellwether stocks portend to an economic slowdown in the US. This stands at a juxtaposition with the idea of raising interest rates – typically interest rates would be lowered during an economic slowdown in an attempt to stimulate economic growth. This could be a reason behind the 10-Year US treasury yield slipping from its 3.2% peak to end the month lower at 2.8%. Despite the Fed noting that it will continue to raise rates in an attempt to stave off excessive inflations levels, some are optimistic that the Fed might actually reduce its aggressive hawkish stance on tackling inflation in favour of protecting economic growth. The most recent inflation figures showed a slight slowdown as consumer prices rose 8.3% during the month of April, slightly below the 8.5% level of March but still exceedingly high.
Optimism surrounding a less hawkish Fed likely underpinned the recovery in US stocks as well those around the globe. The recovery seen in European stocks meant that they also ended the month in positive territory as we saw gains in major European indices such as the Dutch AEX (+0.9%), the French CAC (+0.1%), the German DAX (+2.1%) and the UK FTSE 100 (+1.1%). In similar fashion to the US, inflation in Europe remains elevated with both the UK and Germany experiencing consumer price increases close to 9%. Persistently high inflation has prompted the European Central Bank president, Christine Lagarde, to call an end to negative interest rates in Europe, with the first rate hike to take place later this year. The Bank of England has been more aggressive in its stance on inflation having raised its base rate during the month by 25-basis points, the fourth increase since December last year.
The FTSE 100 was also boosted by strong performances from oil majors such as BP and Shell. The price of Brent Crude rose sharply during May closing the month slightly above $122 a barrel. There are a number of factors driving the price higher which include the European Union agreeing to ban the importation of seaborne Russian oil, effectively reducing supply. In addition, demand for oil is expected to ramp up in the US as its summer driving season commences and in China, Shanghai’s COVID lockdown has come to an end, leading to increased demand pressure. The soaring cost of energy, both oil and gas, has placed UK households under tremendous financial strain in what has been dubbed a “cost of living” crisis. To support those in need, the Labour Party had repeatedly suggested a “windfall” tax be introduced to tax oil companies benefitting from high energy prices but to date the Conservative UK leadership had rejected such a proposal. However, with“Gray” skies now surrounding the Boris Johnson-led government, it has performed an about turn, and the chancellor of the exchequer, Rishi Sunak, introduced such a tax on oil and gas companies profiting from the North Sea region.
Consistent with European markets, Asian equities tracked the fortunes of US markets as major indices, such as Japan’s TOPIX (+0.8%), Hong Kong’s Hang Seng (+2.2%) and mainland China’s CSI 300 (+2.1%), ended the month higher. Chinese equities have been hampered by the impact of lockdowns in the region but news of Shanghai lifting lockdown restrictions will likely be a boost to local equities as well international companies that are reliant on supply from the region.
In line with central banks from other nations, the South African Reserve Bank (“SARB”) continues to raise interest rates. During the month the SARB monetary policy committee increased the repo rate by 50-basis points which means that the prime lending rate now stands at 8.25%. Despite the recent increases, the rate is still below its pre-pandemic level and it is likely South Africans will experience further interest rate increases. Stock prices for South African banking stocks have benefited from the interest rate hiking cycle and the recent increase saw the cohort contribute positively to the local market’s performance for the month. However, the JSE All Share Index still ended the month in the red, down 0.4%.
On the positive front, stock prices for diversified miners climbed during month despite falling prices of industrial metals such as copper (-3%), iron ore (-11%), nickel (-12%), tin (-14%) and zinc (-6%). Along with the banking sector and diversified miners, the fall in the local market was also cushioned by positive performances from Naspers and Prosus.
However, the negatives did outweigh the positives and a significant contributor to the negativeunderperformance was luxury goods company Richemont, having delivered a disappointing set of financial results during the month, reflecting the impact of lockdowns in China. Further detracting from the performance of the local bourse were gold counters, having experienced double-digit declines despite the price of the yellow metal only falling 4% during the month, keeping it below the $1,900/ozt level.
Bullion has been somewhat of a disappointment this year given its affiliation as a hedge to inflation. Part of the disappointment may be explained away by rising yields which reduce the appeal of gold as non-yielding asset. Another factor could be the battle between gold bugs and “cryptonians”. While gold has long been held as safe haven against inflation, cryptocurrencies are fairly new to the game but have been touted, by some, as a better alternative than gold. That theory has been seriously put to the test recently as cryptocurrencies such as Bitcoin have recently shown the tendency to move in the same direction as stocks, rather than act as a hedge. Adding further pain to the issue has been the performance of the digital assets with notable price falls with the 16% decline in the price of Bitcoin during May acting as a prime example. In addition, stablecoins such as Tether, which are designed to be pegged against the US dollar, became “untethered”, having briefly lost the peg, which led fearful traders to pull billions out of the market.