Summary

• Oil prices surged higher in May, driven by optimism around a global economic recovery, as well as expected further supply cuts from OPEC+. West Texas Intermediate Cushing prices rose more than 88% over the month, rallying from under US$20 per barrel to over US$35

• The MSCI All Countries Index rose another 4.2% in May, while the US S&P 500 Index rose by 4.5%

• US Treasuries yields were mostly unchanged, remaining just above 0.65% for 10-year bonds.

• JP Morgan Emerging Market Bond Index spreads continued to fall, ending the month down 96 basis points, from 554 to 458

• The European Union announced the establishment of a €750 billion EU recovery fund over the month. This move is economically meaningful and will also enable debt to be raised under a collective eurozone banner for the first time. 

Market update

Markets are currently optimistic and driving higher, despite the fact that economic recovery is expected to be slow and fragmented. In the US, the S&P 500 rose a further 4.5% in May, bringing total gains since the market bottomed out in late March to more than 36%. The expectation is that, despite the economic damage brought about by COVID-19, the monetary and fiscal policy stimulus will be sufficient in magnitude to ensure that the recovery will be quick, robust and sustainable.

This optimism also spilled over into broader assets, with oil prices staging a remarkable recovery over the month. West Texas Intermediate Cushing oil spot prices rose more than 88% in May, after the futures prices - for the first time on record - briefly dipped into negative territory in April. In addition, further supply cuts by OPEC+ were announced. This helped the commodity’s supply-demand outlook to improve significantly.

For the first time since the height of the coronavirus crisis, cracks appeared in the US dollar trajectory, as it lost some steam in late May. The US Dollar Index lost 2% during the latter part of the month. Part of this greenback weakness relates to the establishment of a €750 billion eurozone recovery fund. 

The significance of this move should not be underestimated. Apart from providing much-needed stimulus, it also heralds the first time that the eurozone will be able to raise debt under a collective European Union (EU) banner. Previously, debt was raised at a sovereign level, which then contributed to the collective EU. Now, subject to ratification, this announcement opens the way for greater EU cooperation and fiscal integration. 

The euro rebounded strongly on the news, while previous concerns around the EU’s ability to stimulate the region’s economies disappeared rapidly. However, it does still remain to be seen whether this arrangement will be politically viable, given the pressing nature of the needed stimulus.
 
After having strengthened in April, the Japanese yen also gave up some ground against a stronger euro. The currency lost more than 4.5% from its highest level in early May.

Emerging markets, while benefitting from capital flows on the back of a risk-on sentiment, remain in a vulnerable space. Latin America is only now beginning to see the full effects of an upwards trajectory in COVID-19 infections. Fragmented policy responses and fragile healthcare systems are at the heart of most emerging markets’ COVID-related problems, a situation which is expected to worsen. Emerging market currencies and bond yields recovered from their worst levels during May, but if their healthcare systems become overloaded over the course of the next few months then currency weaknesses may return.

Fund strategy

We retained a neutral overall equity position, despite debate as to whether the market recovery was overdone. However, in trying to balance valuation concerns against the backdrop of the enormous scale of both monetary and fiscal policy stimulus, we have chosen to be cautiously optimistic. As we believe the stimulus will need to be in place for a prolonged period, there is very little scope for us to remain in a cash position for any length of time.

We do, however, need to be aware of what is priced into the markets versus what is possible in terms of an economic recovery. A recovery in consumer confidence will be key to an upward trajectory. 

At the start of May, we cut back on our defensive Japanese yen position and also looked to increase exposure to investment grade corporate bonds. We held onto our gold producer exchange traded fund position, which has performed remarkably well on the back of the gold price.

Fund performance

In line with the continued positive move in equity markets, the multi-asset funds delivered another positive month. The Global Growth Fund was up 2%, but is still down 7% year to date. Fixed income positions did not add much in terms of performance as US Treasury yields remained flat to slightly higher.

The Global Defensive Fund was up 1.3%, while the Sterling Asset Management Fund delivered 0.9%. While we have lagged the benchmarks in some funds, our peer-group analysis shows that many competitors remain in a similar position. Therefore, our performance against such funds remains pleasing.