Monthly Commentary May 2024

Economic growth remained steady over the month of May, while corporate earnings reports were solid and inflation data was slightly weaker than expected. This combination bolstered risk assets such as equities, and also led to lower yields (and higher prices) in bonds. Global equity markets resumed their march higher in May after April’s weakness, with a number of regional market indices reaching new all-time highs. Global and local bonds also posted solid positive returns over the month. The MSCI ACWI (NZD Hedged) was up 3.7% with USA the standout market. The S&P500 and Nasdaq Index returned 4.8% and 6.3% respectively. Softer inflation data was good for bonds, and the Bloomberg Global Agg Index (NZD Hedged) was up 0.9% for May, in line with the return of local bonds. The Kiwi dollar rose sharply from below U$0.59 to U$0.61 over the month which provided a headwind for unhedged investors. The MSCI ACWI Index (NZD unhedged) was up 0.2% for the month.

On the economic front, a weaker inflation trend was evident in US CPI (consumer price index) and PCE (personal consumption expenditures) figures. The US Federal Reserve prefers to look at the PCE data as it more accurately reflects price changes of what consumers are actually spending money on. The US 10-year bond moved 0.2% lower over the month as markets remained fixated on when the Federal Reserve would be making the first interest rate cut. The ‘goldilocks’ outcome would be for interest rate cuts to be driven by inflation falling back into their preferred band. If the first cuts were due to a weakening economy, either through higher unemployment or falling earnings, this would likely be negative for risk assets such as equities.

With the overall markets up strongly over May, it was a resumption in recent trends in terms of sector leadership. Information technology was far and away the strongest sector, returning nearly 8%.  Communication Services had a strong month, up 5.6%, and is the leading sector in year-to-date terms.  Europe, the UK, Australia, Hong Kong and Japan all posted positive returns between 0.2% and 1.8%, while NZ and Chinese equities were down slightly.