Market Overview

Summary of world markets in May

Global equities posted another strong month, building on April’s impressive rally. Developed markets registered robust gains but were outpaced by the exceptional returns from Asian and emerging market indices. Technology/AI-themed stocks were in the vanguard and heavily influenced index-level outcomes. The constant stream of news about the progress (or lack thereof) in the US-Iran negotiations buffeted all asset classes, with oil prices and bond yields rising as news worsened and then easing when peace prospects improved. As such, bond yields fell back at the end of the month, retreating from multi-year highs. Oil prices began the month strongly due to supply disruption worries but declined later due to optimism about a US-Iran peace deal.

Equity markets: US markets performed strongly and both the broad index and the Nasdaq index posted new record highs.  Gains in technology hardware and AI-related stocks dominated the picture as the superscalers continued to plough cash flow into AI projects and investments.  Strong earnings results from the technology sector reinforced investors’ enthusiasm, and earnings from the rest of the market, in aggregate, were also robust.  That said, the lack of clarity around the future monetisation of AI-related capex remains, which is bringing greater scrutiny to the likes of Meta, Google and Microsoft.  However, overall, the momentum behind this theme carried the market through the uncertainties caused by elevated oil prices, hotter inflation data and higher bond yields.

The AI theme has also been all-pervading in Asia, where it has been an extraordinary few weeks in markets. The Korean market experienced another breathtaking month, spurred on by turbo-charged returns from index giants Samsung Electronics and SK Hynix, which are enjoying a period of exceptional earnings growth due to their roles in the AI supply chain and the associated chip memory shortage, which is resulting in strong pricing power.

Chinese equities were relative laggards, with ongoing weakness in the domestic economy, trade tensions, and generally cautious sentiment weighing on the market. India was another weak market thanks, in part, to its lack of exposure to the AI “winners”, as well as concerns about the country’s reliance on imported oil, particularly given the weakness of the rupee. It is worth highlighting that the composition of Asian indices has changed markedly in recent times: Taiwan is now larger than China; the technology sector has a weighting of more than 40%; and TSMC alone makes up more than 15% of the index, meaning that active managers adhering to UCITS rules are unable to express a full position – this has been an important relative performance headwind for active funds in recent months.

The Japanese market performed strongly, with indices hitting new highs. Sentiment was boosted by positive economic data, with Prime Minister Takaichi’s expansionary policies beginning to have an effect. The market’s exposure to “picks and shovels” AI companies (semiconductor equipment and testing tools) also stood it in good stead. That said, this came with volatility and bouts of profit-taking. SoftBank was a standout performer, surging on AI-related sentiment and IPO expectations around portfolio companies (notably OpenAI); indeed, at the end of the month, it overtook Toyota Corp as the most valuable publicly traded Japanese company.

European indices delivered robust returns, despite disappointing macroeconomic data, including weak PMIs and consumer confidence readings, which confirmed a lacklustre outlook. The conflict in the Middle East has weighed on European markets, and therefore signs of progress towards a deal gave stocks a boost later in the month. Elevated energy prices have caused mounting worries about inflation and strengthened expectations that interest rates will need to rise. As in other markets, leadership was relatively narrow, with companies involved in the AI infrastructure theme, such as ASML and Infineon, performing very well, while defensive sectors lagged.

UK equities gained ground, but the market’s low exposure to technology and the AI theme left it languishing behind its developed-market peers. Political uncertainty also cast a shadow, with a poor local election outcome placing Prime Minister Starmer’s position in jeopardy amid a loss of confidence within and outside the Labour Party. Sector-wise, energy stocks weighed on the large-cap index while, in a change of pace, domestic and consumer sectors outperformed. This was helpful for the more cyclical mid- and small-cap indices, which were lifted by the general improvement in risk sentiment towards the end of the month.

Style-wise, with technology-related stocks in the vanguard, it was a strong month for growth across all global markets.

Bond markets: Bond yields rose early in the month but eased back later as it appeared that an end to US-Iran hostilities was in sight. The situation in the Middle East has caused volatility in government bond markets due to mounting inflationary risks, with key data points such as US wholesale and consumer price inflation posting large increases. This has resulted in markets raising their expectations for interest rate hikes later this year. The 30-year US Treasury yield briefly rose above 5%, its highest level in many years.

UK gilts delivered a positive total return, despite the early-month yield rises that took the 10-year to a yield of almost 5.2%, its highest level since 2008. Sentiment towards the gilt market was also overshadowed by politics and the prospect of leadership change, with potential consequences for fiscal policy. Despite concerns about inflationary pressures because of the Iran situation, the broader picture of softening economic data helped to moderate expectations of interest rate rises from the Bank of England, and this saw yields fall back meaningfully.

It was a positive month for credit markets and spreads tightened as risk appetite improved.  Broadly, investors continued to be attracted by attractive “all-in” yields, despite very narrow credit spreads.

Commodity and currency markets: Although oil prices posted a monthly decline amid expectations that Washington and Tehran may eventually reach a more durable agreement, they remain elevated compared with pre-conflict levels, as the near shutdown of Hormuz continues to cause major disruption to global energy supplies.

The gold price fell slightly during the month and continued to be buffeted by newsflow from the Middle East, inflation expectations, rising bond yields, and a stronger dollar. The peak price for the precious metal occurred in January, and it has been under pressure since then.

The copper price rose further. On the demand side, growing optimism surrounding the rapid expansion of artificial intelligence technologies and the rapid construction of data centre infrastructure bolstered the outlook for copper. Rising copper consumption across global power grids, driven by the ongoing transition towards cleaner energy sources, also strengthened the bullish demand narrative.

The US dollar drifted higher during the month, which meant that unhedged dollar-based assets within sterling-based portfolios enjoyed a performance boost.