Trends we’ve seen develop at the start of this year have continued through to May, as inflation and economic growth remain the primary focus of developed markets, with Covid-19 lockdowns and restrictions playing a huge role in the economic activity in emerging markets, particularly in China.
The US Federal Reserve (and many other Central Banks) are under continuous pressure to hike rates to control soaring inflation and preserve economic growth. These rising interest rates have caused bond prices to fall (both in the US and globally) and continued to drive the negative returns we have seen from Bonds in May and in 2022.
Geopolitical challenges continue to affect markets, particularly the conflict in Ukraine which has caused inflationary concerns through rising energy and food prices. In addition to this, the stringent Covid lockdowns that were imposed in China continued throughout May, impacting major commercial hubs and adding to the inflationary woes as supply are unable to keep up with demand.
Closer to home, data released in May showed that UK inflation continued to climb in March, up from 7.0% to 9.0% year on year (YoY), reaching a 40-year high. This reflects a real-term increase in the prices of goods and services which many people are feeling the effects of.
Elsewhere, US inflation dipped marginally from 8.5% to 8.3% YoY for April. Eurozone inflation remained elevated at 7.4% YoY, and estimates released at the end of the month expect this to climb to 8.1% for May.
Labour markets continue to perform well, with UK unemployment declining from 3.8% to 3.7% this month. We saw the number of job vacancies hit record levels, with around 500,000 more job vacancies than pre-pandemic levels. Data released in May (for April) also showed that there was a slight uptick in the UK’s manufacturing sector, but an overall slowdown in growth for the UK’s services sector.
Stock markets had mixed performance in May, with most markets being relatively flat, despite significant volatility over the course of the month.
The 0.2% return from the MSCI All Country World Index, which includes both developed and emerging markets, provided some calm after April’s turbulent performance.
In the UK, the FTSE 100 (+0.8%) gained ground, while the FTSE 250 (-1.4%) ended the month in negative territory. The FTSE 100 has benefitted from its large exposure to the energy sector which has performed well in recent months.
Elsewhere in developed markets, US markets were flat (0.0%) and Japan (+1.7%) delivered positive returns, while Europe (-1.6%) ended the month in negative territory. Meanwhile, emerging markets also eked out a positive return of 0.1% despite a negative return from Asia Pacific excl. Japan (-0.1%)
Sterling gained 0.2% against the US dollar during May, and for UK investors in US shares, this resulted in returns slightly dipping into negative territory for the month.
Sterling lost value against most other major currencies, including the euro (-1.6%) and the Japanese yen (-0.6%). This was driven by differences in interest rate expectations across these economies, resulting in Sterling giving back some of its April gains.
While the trajectory of interest rates is expected to be greater in the UK than in Japan and Europe, these currency movements reflect mild changes in these expectations from the previous month. However, this does mean that shares held in Japan and Europe were positively impacted by these currency movements.
Investment type performance breakdown
In our Original Plans, shares (0.3%) provided positive returns, while concerns over inflation and interest rates impacted returns for bonds (-0.2%). Property (-5.4%) was negatively affected by signs of slowing housing markets in the US and UK.
In our Ethical Plans, on the other hand, shares (-1.5%) bonds (-0.5%) delivered negative returns. Shares held in the Ethical Plans were negatively impacted by the continued trend of value shares outperforming growth shares (growth shares are in companies that have the potential to outperform the overall market over time due to their future potential, while value shares are companies that are currently trading below their ‘true’ worth). We remain confident in the long-term prospects of sustainably managed and focused companies.
Summary with Plan details
May proved to be a negative month for all our Investment Plans in both Original and Ethical themes.
Original Plans that have more bonds, such as our Cautious and Tentative models, had better performance than those Plans with more property, such as our Ambitious and Adventurous Plans. Plans with more property also hold more shares, which provided a positive counter to the negative property returns and saw the Plans all deliver similarly small negative returns in May. The story for Ethical Plans was slightly different, with Plans with more bonds than shares showing better performance as growth shares continued to come under pressure.
Our Investment Team continues to actively monitor the financial markets and their impact on your Plan, and as always, we are ready to act in your best interests to events as they unfold. This is why in May we decided to reduce the risk of the US dollar appreciating against Sterling by hedging a proportion of our US shares across both Original and Ethical plans. This was positive for May as Sterling appreciated slightly against the US dollar.
We will continue to look for opportunities to position your investments with the goal of protecting your money and achieving your long-term objectives.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.