Overall Market Summary:
Global shares rose in May, with developed markets outperforming emerging markets. Investors continued to anticipate interest rate cuts, though US cuts are expected later than those in other regions. Oil prices declined during the month.
United States:
US shares posted strong gains in May, driven by robust corporate earnings and hopes of interest rate cuts later this year.
The equity market advance was led by the information technology, utilities, and communication services sectors. The energy sector lagged due to weaker oil prices. Several of the "Magnificent-7" stocks performed well, fueled by strong earnings and high demand for AI-related technologies.
Inflation data remained above the Federal Reserve's (Fed) 2% target. Fed Chair Jay Powell noted a “lack of progress” on reducing inflation but suggested that interest rate rises were unlikely. The core personal consumption expenditures index, the Fed's preferred inflation measure, registered 2.8% for April. Earlier in the month, data showed inflation, as measured by the consumer price index, dipped to 3.4% in April from 3.5% in March.
The US economy showed signs of moderation. Non-farm payrolls data revealed 175,000 jobs were added in April, below consensus expectations.
Europe:
Eurozone stocks advanced, with the real estate and utilities sectors among the top gainers. Investors anticipated a rate cut at the European Central Bank (ECB) meeting in June. Financials also performed well, while energy and consumer discretionary sectors were weaker.
Eurozone annual inflation increased to 2.6% in May from 2.4% in April. Despite this, a 25 basis point rate cut is expected when the ECB meets on 6 June, though the timing of further cuts remains uncertain.
In Germany, labour market data showed wages growing at the fastest pace in nearly a decade, with collectively agreed wages up 6.3% in Q1 2024. Forward-looking data indicated economic recovery, with the HCOB eurozone purchasing managers' index (PMI) for May reaching a 12-month high of 52.3.
United Kingdom:
UK equities rose, with the FTSE 100 achieving fresh all-time highs. Financials and industrials were the top contributors, while small and mid-sized equities performed strongly amid a flurry of new bids and hopes of a recovery for domestically focused areas of the market.
The UK economy rebounded strongly in Q1 2024, recording GDP growth of 0.6%. However, a lower-than-expected decline in annual consumer price index inflation to 2.3% in April delayed the timing for the first expected rate cut by the Bank of England.
Prime Minister Rishi Sunak announced a general election to be held on 4 July. Bid activity for UK-listed companies reached its highest level since 2018, driven by overseas buyers, boosting hopes that the UK equity market is at a turning point.
Japan:
The Japanese equity market rebounded in May, with the TOPIX generating a total return of 1.2%. However, the Nikkei 225 underperformed due to weakness in large-cap technology stocks. Sectors such as automotive and domestic-oriented retailers also underperformed, while the financial sector outperformed, driven by rising long-term interest rates in Japan.
The weak Japanese yen and conservative earnings guidance from companies weighed on market sentiment. However, full-year earnings results were stronger than expected, highlighting sales growth, pricing power, and cost control across various sectors.
Many companies committed to the Tokyo Stock Exchange's initiatives, leading to a record-high amount of share buybacks in the new fiscal year. The labour market remains tight, and gradual wage increases are expected to support consumption in the coming months. The record-high number of inbound tourists is also anticipated to contribute to the economic recovery.
Asia (excluding Japan):
Asia ex Japan equities achieved modest gains in May. Taiwan, Singapore, and Malaysia were the best-performing markets, while Indonesia, the Philippines, and South Korea were the worst-performing markets. Mainland China and Hong Kong ended the month positively, supported by higher-than-expected first-quarter economic growth.
Taiwan's stocks achieved robust gains driven by investor enthusiasm for AI developments. Indian stocks also saw modest growth as investors shifted focus from China to India's fast-growing economy. South Korean stocks were weaker amid concerns about the global economic outlook and US interest rate cuts.
Emerging Markets:
Emerging market (EM) equities rose in US dollar terms, though they lagged behind developed market peers. Softer US macroeconomic data and better performance from Mainland China supported EM returns. Lower energy prices weighed on some Middle Eastern markets.
Egypt was the top-performing market, followed by the Czech Republic. Colombia benefited from a central bank interest rate cut to 11.75%, and Turkey posted its first monthly gains in some time, aided by currency strength and strong earnings results. Chile outperformed due to currency strength and a 50bps interest rate cut to 6%. Taiwan, Peru, and Poland also performed well.
Mainland China outperformed on optimism about housing sector support and President Xi's reform rhetoric. India saw modest gains with national elections underway.
South Africa posted flat returns, trailing the index amid investor concerns ahead of national elections. Greece, Thailand, and Mexico delivered negative returns, influenced by the general election in Mexico. Korea lagged due to foreign equity selling, and declining Brent crude oil prices impacted UAE, Qatar, and Saudi Arabia. Brazil ended the month in negative territory following flooding in Rio Grande do Sul.
Global Bonds:
Government bond markets diverged in May. US Treasury yields fell from year-to-date highs, outperforming European markets where yields increased. Positive inflation data, signs of weaker growth, and softer labour market indicators supported US bonds. Fed chair Jerome Powell hinted that rate hikes were unlikely, maintaining an easing bias.
Renewed confidence in the Fed lowering interest rates later this year supported credit markets. US investment grade (IG) corporates outperformed European markets on a total return basis, with financials seeing spread compression due to lower supply and a constructive economic backdrop. Both US and European high yield (HY) performed well.
US labour market overheating concerns eased with falling job openings and voluntary job departures. Softer-than-expected non-farm payrolls, a fall in oil prices, and modest inflation led the market to price in higher chances of rate cuts later in the year.
In the UK, Prime Minister Rishi Sunak announced a general election for 4 July. The Bank of England's Monetary Policy Committee meeting outcome was seen as dovish, though disappointing inflation data drove a later sell-off in gilts.
Eurozone inflation news added upward pressure on yields, with higher-than-expected core inflation driven by the service sector.
The US dollar weakened against all G10 currencies due to softer rate expectations.
The FTSE Global Focus convertible bond index rose by 1.4%, showing limited participation in equity market gains. The primary convertible bond market was active in May, with a Chinese internet platform raising a record $4.5 billion. Momentum in convertible valuations in Europe and Japan appeared to be ebbing.