Month ending 31 May
Sterling weakness continued to bolster overseas returns in May, while a strong US dollar and political risk weighed on emerging markets and Europe. The US led the way in GBP terms, delivering +6.3%, followed by the UK (+2.8%) and Japan (+2.7%). Fears of tighter liquidity in US dollar emerging market debt weighed on emerging market equities, which fell -0.4%. Fears of a euro-sceptic Italian government weighed on European equities, which declined
European government bonds also declined in local terms, falling
-1.8%, while those in other regions strengthened. UK Gilts gained +1.7%, US government bonds gained 0.9% and UK corporate bonds were flat.
GBP continued to decline against all main currencies, falling -3.8% versus JPY, -3.4% versus USD and -0.2% versus EUR.
Oil showed some weakness in May, declining -2.2% in USD terms, while gold weakened -0.6%.
So far, 2018 has been a mixed year for markets, with some pronounced currency movements and ongoing political risk. In Europe, political tensions continue to test the stability of the European Union. Trade friction persists between the US and China, as well as the EU. A stronger US dollar has weighed on those emerging markets with weaker fundamentals. However, the risk of higher inflation in developed markets leading to aggressive tightening appears to be receding and we expect solid economic and profits growth to continue for now.
In the current economic environment, we believe that shares can continue to outperform bonds, although we expect more modest returns and higher volatility to persist. Moreover, stock selection will continue to be key.
We remain slightly overweight equities and underweight bonds. At a regional equity level, we remain underweight UK equities. We continue to favour Europe, Japan, emerging markets and the US. Within bonds, we are keeping duration short to reflect the rising rate environment. We continue to use alternatives for diversification.