Global Market Review – May 2024

Global Market Review – May 2024

Global equity markets bounced back to new highs in May upon stronger US corporate earnings results and hopes of lower interest rates later this year. However, persistent inflation is keeping markets volatile, although eventual clarity on interest rates should support share prices.

Global share markets roar back

Global equities rebounded to new highs at the start of May, returning 4.5% in USD and 2.1% in AUD terms over the month, following the April sell-off. This followed better-than-expected earnings reports from companies such as Amazon, Sony and UnitedHealth. Surging demand for cloud computing capacity in AI data centres fuelled demand for Nvidia’s fastest semiconductors. Its shares have gained over 120% since the start of this year. This helped growth stocks outperform value in May.

Equity markets also rose on hopes of early interest rate cuts after April inflation fell to 3.4% in the US, to 2.3% in the UK and remained steady at 2.4% in the Eurozone.

The US Federal Reserve (Fed) kept interest rates on hold at its May meeting, confirming it was unlikely to hike rates again this cycle. Dovish sentiment was reinforced by weaker US labour market data which showed fewer jobs created in April, as unemployment edged up to 3.9% and wage inflation moderated.

The European Central Bank indicated it will cut rates at its June meeting, after Sweden’s Riksbank reduced rates by 0.25% to 3.75%.

But sticky inflation sends equities back down

However, global share markets gains moderated later in May as expectations of lower US interest rates receded. Minutes from the last Fed meeting showed it had discussed raising rates if inflation doesn’t return to its 2.0% target. Subsequently, board member Christopher Waller said in a speech that “several” months of falling inflation would be required to cut rates. Bond yields finished May little changed.

This more negative sentiment was reinforced by stronger US consumer sentiment and business activity data, especially in the services sector which continues to struggle with labour shortages.

China’s efforts to stimulate its economy through supporting high-end industrial production seemed to falter in May, as manufacturing activity unexpectedly fell. This comes as its pivot from infrastructure and property investment into green economy exports faces the threat of US and EU tariffs. Meanwhile the consumer sector weakened further, with retail sales growth falling in April and the drop in house prices accelerating.

Australian share market boomerangs

Australian equities made solid gains at the start of May, which reflected the upswing across global markets, before falling back to close the month up 1.7%.

The Reserve Bank of Australia kept interest rates unchanged at 4.35% in line with market expectations, pushing 10-year bond yields down 0.09% to 4.40%. The Federal Budget contained measures intended to bring down headline inflation. However, there are fears that its cost-of-living subsidies and income tax cuts will boost consumer spending, fuelling underlying inflation.

Australia’s somewhat volatile monthly inflation reading edged up again in April to 3.6%, although consumer inflation expectations edged down to 4.1%.

Strong natural gas prices supported earnings growth in the sector, but most metal prices – including iron ore, copper and gold – were little changed over the month.


Where does this leave investors?

While economic activity and corporate earnings continue to slow gradually, there is little sign of a near-term recession. Pengana portfolios are firmly focussed on companies able to grow earnings during a period of elevated interest rates and subdued consumer spending.

These include businesses with a technological advantage especially in AI, groups engaged in factory automation and onshoring, pharmaceutical companies able to secure drug approvals, luxury goods houses with strong brand loyalty, disintermediated consumer brands and healthcare providers able to meet rising demand.

Companies with highly cyclical earnings, strong exposure to discretionary consumer spending, high borrowings or unsustainable business plans should be viewed cautiously.

Stimulus measures in China should bring opportunities in well-managed businesses whose business models support China’s strategic priorities, but which don’t depend on exports or sensitive western technology.

Tim Richardson CFA, Investment Specialist

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Pengana Capital Group