Market Commentary May 2021

US inflation on the rise

Expectations of rising inflation became reality in May, as the latest inflation print from the US showed a year-on-year rise of 4.2%. Although the year-on-year comparison is flattered by a low inflation figure twelve months ago, there are still a number of drivers behind this headline figure, including the effects from the Fed’s aggressive fiscal and monetary easing, the narrowing of spare economic capacity, rising input costs (raw materials and energy) and the combination of the unwinding of pent-up consumer demand and supply-side constraints resulting from Covid.

European markets continue to rebound strongly

Strong gains were seen once again across the European markets, as investors continued to look past the current difficulties surrounding the Covid vaccination programmes, and out to the wider global economic recovery. Smaller EU nations were particularly strong, driven by good uplifts in GDP reported in the first quarter. Some smaller markets have returned more than 20% so fa this year. The Euro Stoxx 50 Index hit a new high on 1st June.

Commodities resume strong upward trend

Commodity prices around the world resumed their strong upward trajectory, with gains across the board. Energy commodities (oil, coal etc.) gained another 7.1%, making a total gain of more than 35% so far this year. Meanwhile, agricultural commodities (wheat, soy beans, coffee etc.) gained 5.7% (14.4% YTD), fertilizers rose by 4.4% (34.6% YTD) and metals and minerals gained 9.1% (26.2% YTD). Precious metals also rebounded strongly, with gold erasing all its year-to-date losses.

Emerging markets see inflows from investors

Emerging markets rallied once again in May, as the dollar weakened, rates remained low, and inflation began to become more visible. This is the perfect combination of factors for the emerging market economies, with their massive dollar-denominated debt and manufacturing economies. Investors have been quick to get on board with the emerging market recovery, and during May, one manager, Federated Hermes, announced that its Global Emerging Market Equity Fund would close to new investors from 15th June to maintain its liquidity and “portfolio characteristics”.

 

 

May was another positive month for equity investors generally, as all the major markets turned in gains and the emerging markets were also at the forefront once more. The reality of higher inflation numbers was established as the US headline CPI inflation rose to 4.2% and core inflation (excluding energy and food) hit 3.0%. Whilst higher inflation usually means higher interest rates, central banks appear minded to keep rates as low as possible for as long as possible to support the recovery and inflate away some of the debt that has piled up during the Covid crisis.

 

France was, once again, a strong performer, though Italy gave the best return in May. Despite France’s poor track record in rolling out Covid vaccinations, the CAC Index, at its peak, was up 16.9%, making it the best of the main global markets this year. Outside of the majors, many peripheral European markets saw strong growth, based on optimism for the global recovery and their own strong GDP growth in the first quarter of the year, led by Slovenia, up more than 27% so far in 2021. The pan-European Euro Stoxx 50 Index also hit a new all-time high on the morning of Tuesday 1st June.

 

Sterling continued its medium-term appreciation in May, benefiting from the rapid vaccine roll-out and the imminent return to “normality” expected in the second half of June. Britain has mostly maintained low single-digit deaths from the virus, despite the rise of the Indian variant. A weak dollar was the other striking feature of the currency markets, as higher inflation, coupled with a lower-for-longer monetary policy compounded the effect of the massive US trade deficit and savings shortfall to undermine the currency.

 

Bond markets represented an oasis of relative calm in May, amid the volatility of equities and commodities. Whilst many yields around the world remained flat, or edged lower, the total return from all sections of the global bond market was negative for Sterling investors, due to the strength of the pound during the month. Returns from sovereigns, IG corporates and high yield bonds were barely differentiated. This was despite the minutes of the latest Fed meeting reflecting some more hawkish views, that the tapering conversation should start sooner, rather than later.

*A Generic bond is a theoretical bond that always has the specified tenor, unlike a Benchmark bond, which is a physical bond, with a decreasing tenor.

Disclaimer: The information contained in this report is for illustrative purposes only and should not be construed as a solicitation nor offer, nor recommendation to acquire or dispose of any investment. Specifically, the share class used to create the illustrations may not be available on all platforms nor be suitable for individual investors. This report was produced by Collidr Research (“Collidr”) for Affinity Integrated Wealth Management (AIWM) and while AIWM and Collidr use reasonable efforts to obtain information from sources which they believe to be reliable, neither AIWM nor Collidr make any representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are subject to change without notice. Model returns are calculated using the most appropriate share class of the underlying funds, having regard to the illustrative nature of the report, with all income being reinvested. As a result, real portfolio performance may vary from model performance. Where model portfolio histories are shorter than three years, historic model returns are substituted prior to inception date with returns from an Collidr performance benchmark. This benchmark is constructed from the average returns of all Collidr portfolios with similar risk profiles that existed during that time. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. Affinity Integrated Wealth Management is a trading style of Buryfield Grange Limited, Buryfield Grange Life Planning Limited and Affinity Integrated Wealth Management Ltd. ‘Buryfield Grange Limited’ is authorised and regulated by The Financial Conduct Authority. Not all services provided by Buryfield Grange are regulated by the Financial Conduct Authority. ‘Buryfield Grange Limited’ is registered in England and Wales at Inspire House, 20 Tonbridge Road, Maidstone, Kent, ME16 8RT. Company registration number 4568338. Collidr Research is a trading name of Collidr Technologies Limited, registered in England and Wales at 34 Southwark Bridge Road, London, SE1 9EU. Company registration number 09061794. Data Providers: Bloomberg L.P. and Collidr.

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