Most equity markets continued their recovery during May, albeit at a slower pace than April. The unprecedented amount of stimulus provided by central banks and governments have offset the worry of declining profits, weak economic data and increasingly hostile war of words between US and China. At the National People’s Congress (NPC) in China, Premier Li Keqiang said in a speech that China will not set a 2020 economic growth target, ‘due to foreign markets being so uncertain’. It is the first time Beijing has not set a target for its GDP since 1990. Also at the NPC the Chinese government said it planned to impose a new national security law on Hong Kong. This provided a headwind to equity markets in the region, with the MSCI Asia Pacific ex Japan index declining 0.2% over the month.
The US equity market led global equity indices higher despite already stretched valuations and the economic impact of the Coronavirus. Large US technology firms led the market for most of the month with the Nasdaq up 6.5%. This has led to forward looking valuation measures in some sectors looking increasingly extreme. The US Software sector has never traded on a higher multiple in terms of forward sales multiples, currently at 9.5x. For the US market overall, earnings from the first quarter of the year pointed towards a -64% decline (90% of companies), which would be the lowest level of quarterly earnings since quarter 1 of 2009. Quarter 2 earnings are likely to be worse. US companies have haemorrhaged staff over the past couple of months, with 40.8 million people having filed for unemployment in America over the last 10 weeks. The consensus is that the US unemployment rate is around 20%-25%.
The Japanese market had a positive month up 6.7%, buoyed by a further stimulus packages and the fact that there was no enforced lockdown in Japan has allowed businesses to restart seamlessly. European markets too had a positive May with the MSCI Europe ex UK index up 4.1% during the month. Business and consumer confidence have improved in May as children return to school and shops and restaurants re-opened. With social distancing in place still it is not business as usual however it does allow a restart.
UK markets have also taken steps forward this month. The FTSE All Share was up 3.4% over the month and the FTSE 100 rose by 3.3%, moving above 6000 in the final weeks of the month. The FTSE 100 is now 22% above the lows in March. Leisure Goods, Miners and Industrial sectors were the top performing sectors with Banks, Food Producers and Aerospace and Defence the laggards. In general ‘Growth’, ‘Momentum’ and ‘Quality’ continued to outperform ‘Value’, increasing the dispersion of valuations within markets.
UK corporate credit market rose 0.9% in the month. The asset class is well supported by central bank purchasing programs, with the US Federal Reserve buying $300mn of corporate credit ETF during the month. At month end the UK the government bond yield curve was negative from 2 years to 6 years duration, with the 10 year government bond at 0.18%.
After falling into unchartered waters last month the Brent Crude oil price rebounded 38% in May. Saudi Arabia announced it will cut its oil production by an extra 1 million barrels per day starting in June, on top of the reduction previously agreed under the latest OPEC+ deal. Brent Crude is still 42% below where it was a year ago at $37.8 (per barrel). Gold continued to rise, finishing the month up 2.6% at $1,726 (per Ounce).
Chief Investment Officer