Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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The bull and bear tug of war is on. Who will pull the hardest?
Market Rewind
Søren Otto Simonsen
Senior Investment Editor
Summary: Financial markets these days are like a misaligned date - showing mixed signals. Is this going to be a positive experience or not? You can find arguments for both, but sour data out of China seems to have been the dominationg factor in May, while other data is showing positive signs such as easing inflation in Europe. Whether bulls or bears will win the tug of war and whether the mixed signals will become more directional remains a big question going into the Northern hemisphere's summer months.
The broadest measure we use here – global equity performance – fell by 1.2% in May. While it’s been a busy month, the overarching headline for the negative numbers must be worries about Chinese activity slowing down. On the positive side, there are a few things to mention such as a relatively positive earnings season, AI hype (for most of the month), easing EU inflation and a hopefully undramatic debt ceiling agreement in the US. It can be argued whether the market impact of some of these events was more neutral than positive, along the same lines as the FOMC meeting early in the month, where the Federal Reserve hiked interest rates again, with an outlook to possibly taking a break.
US 0.2%
US equities are almost the perfect showcase of the standstill that financial markets find themselves in these days. The performance basically ended flat for the month despite a lot of action – especially on the macro-political side. Early in the month, one of the most anticipated FOMC meetings in quite a while took place and ended much as people expected. The debt ceiling negotiations also took place in May and seem to be over without any real fuss. Artificial Intelligence stocks have been very much in focus for most of the month in a positive light. But later in the month, they also took a turn down as the valuation of these equities was brought into question.
Europe -3.2%
Despite being the outperformers of the past year, European stocks disappointed in May, falling 3.2%. On the top line, this move can be a head scratcher, as several European economies showed signs of easing inflation during the month. But it seems as though weak data coming out of China indicated faster-than-expected slowing of production in companies strongly connected to the eurozone took precedence. Simultaneously, the worries about how the US debt ceiling negotiations would end sent negative karma across the Atlantic, despite the chilled outcome.
Asia -1.2%, Emerging Markets -1.9%
Both Asia and Emerging Markets regions are quite interesting in evaluating May’s performance figures, as both regions are heavily dominated by Chinese equity performance and that has not been a pretty story. Several key figures regarding production and activity in China have indicated a faster and quicker downturn than most experts anticipated. This has sent Chinese equities down by a rather wide margin. As mentioned, that has sent tremors westward, muting equity performance in Europe, but it has also pulled down both Asia and Emerging Markets, despite decent performance in South Korea, Japan and India.
In many ways, AI was the topic of the month for equities. That, combined with a solid earnings season, put the Information Technology sector in front as the month’s best performing sector, climbing 8%. The only other sector in positive territory was Communication Services.
Energy was the worst performing sector, falling more than 10%. The negative performance is closely tied to the month-long sell-off in oil and the re-emergence of short speculators in that realm. Oil showed some signs of stabilising in the latter part of the month, but it wasn’t enough to avoid taking last place. Materials was the second-worst performing, due in large part to growing worries of a financial slowdown based on weak Chinese data.
Bond performance was muted but negative across the board. Those results are basically down due to uncertainty as to whether the tightening of interest rates is coming to an end or will continue, combined with a strong dollar and falling commodity prices.
Check out the rest of this month’s performance figures here:
Sources: Bloomberg & Saxo Group
Global equities are measured using the MSCI World Index. Equity regions are measured using the S&P 500 (US) and the MSCI indices Europe, AC Asia Pacific and EM respectively. Equity sectors are measured using the MSCI World/[Sector] indices, e.g., MSCI World/Energy. Bonds are measured using the USD hedged Bloomberg Aggregate Total Return indices for total, sovereign and corporate respectively. Global Commodities are measured using the Bloomberg Commodity Index. Oil is measured using the next consecutive month’s WTI Crude oil futures contract (Generic 1st 'CL' Future). Gold is measured using the Gold spot dollar price per Ounce. The US Dollar currency spot is measured using the Dollar Index Spot, measuring it against a weighted basket of the following currencies: EUR, JPY, GBP, CAD, SEK and CHF. Unless otherwise specified, figures are in local currencies.
Global equities are measured using the MSCI World Index. Equity regions are measured using the S&P 500 (US) and the MSCI indices Europe, AC Asia Pacific and EM respectively. Equity sectors are measured using the MSCI World/[Sector] indices, e.g., MSCI World/Energy. Bonds are measured using the USD hedged Bloomberg Aggregate Total Return indices for total, sovereign and corporate respectively. Global Commodities are measured using the Bloomberg Commodity Index. Oil is measured using the next consecutive month’s WTI Crude oil futures contract (Generic 1st 'CL' Future). Gold is measured using the Gold spot dollar price per Ounce. The US Dollar currency spot is measured using the Dollar Index Spot, measuring it against a weighted basket of the following currencies: EUR, JPY, GBP, CAD, SEK and CHF. Unless otherwise specified, figures are in local currencies.
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