May 2023 Market Insights
Developed markets were generally weaker as investors remained concerned about stagnant Chinese growth and recessionary fears globally.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in May?
Developed markets were generally weaker as investors remained concerned about stagnant Chinese growth and recessionary fears globally. The U.S. presented a mixed picture though as multiple positives such as resilient consumer spending numbers, favorable quarterly earnings that generally met or beat expectations with signs that the U.S. Federal Reserve is nearing the end of its tightening cycle.
The standout positive performers were the Japan’s Nikkei 225 Index, up +7.04% and the U.S. NASDAQ Index, which was up +5.80% (local prices). Weakness once again came from Hong Kong’s HSCEI and HSI Index, down -8.04% and -8.35% respectively (local prices) although European markets as well as the U.S. Dow Jones Index were also quite weak.
Further weakness of the AUD by +1.73% against the USD and +0.68% against the € helped AUD returns for the Trends and indices.
Nearing the peak for U.S. interest rates
The U.S. Federal Reserve lifted interest rates again by 0.25% to a benchmark rate of between 5.00% and 5.25%, up from nearly zero in March 2022, the highest level in 16 years. Whilst there is likely to be room for one more rate increase, it has also hinted that we may be nearing the interest rate peak as inflation is controlled.
This helped U.S. markets along with news of the debt ceiling and spending deal being finalised. Importantly, U.S. earnings and guidance were generally above expectations even though interest rates are impacting how and where consumers are spending their money.
Rate rises set to continue in Europe
European economic sentiment remains weak with a stagnating economy, elevated inflation, and rising interest rates being the main drivers. Sentiment deteriorated among manufacturers, service providers, retailers, and constructors.
Headline inflation in the European Union slowed to an annual 6.1% in May from 7.0% in April, but this did not stop the European Central Bank from raising rates again, this time by 0.25%. It appears that most policymakers voted to slow the pace of rate increases to 0.25% but signaled an intention to tighten monetary policy further.
Chinese growth has slowed with Japanese equities rallying
China’s official manufacturing Purchasing Managers’ Index fell to 48.8 in May from April’s 49.2, making it the second consecutive month of contraction and the lowest levels since December 2022. Production activity also contracted, driven by slowing new orders and exports.
The non-manufacturing Purchasing Managers’ Index also eased, falling to a weaker than expected 54.5 in May from 56.4 in April.
New data from the China Real Estate Information Corp also showed that the real estate sector was still recovering despite the stimulus measures implemented since the end of 2022.
Continuing renewed foreign investor interest in Japan meant equities in Japan had a strong month. The Main Japanese indices reached 33-year highs, with the gains supported by strong domestic earnings as well as some yen weakness.
Further, data released by the Japan Tourism Agency, hotels and other accommodation facilities recorded over 10 million overnight stays by foreigners in April for the first time since the outbreak of the coronavirus pandemic.
Tourism was aided by a weaker yen and an increase in international air traffic due to the lifting of Japan’s COVID border controls for all arrivals in April.