Market Analysis May 2020

US shares witnessed an upswing in May as optimism bloomed regarding the reopening of the economy. By mid-month, every US state had outlined plans to ease restrictions, sparking a positive sentiment in the market. Simultaneously, the US dollar weakened as investors grew more risk-tolerant. The contraction of the economy in Q1, which was larger than initially estimated, did not significantly dampen investor confidence.

The real GDP for Q1 was revised to a -5.0% annual rate, marking the sharpest quarterly decline since Q4 2008. This was primarily attributed to a substantial drop in consumer spending, particularly within the services sector. Despite concerns about potential rekindling of US-China trade tensions, investors remained focused on the global resumption of economic activities.

During May, US equities rallied in tandem with international indices, with sectors like materials and industrials, along with the IT sector, showing robust performance. Although consumer staples and energy still experienced growth, their gains were relatively subdued compared to the broader market.

Continuing its upward trajectory, eurozone equities climbed in May as several European nations initiated the phased relaxation of lockdown measures. Investors also reacted positively to the EU's proposed recovery plans in the post-pandemic era.

European Commission President Ursula von der Leyen proposed a borrowing capacity of €750 billion for a recovery fund aimed at aiding regions hit hardest by the pandemic. This was in addition to the €540 billion rescue package agreed upon in April. To repay the debt, she suggested implementing new taxes. Approval from member states is required for this plan, and discussions on the recovery fund were scheduled for the June European Council summit. Moreover, there were indications that the ECB's asset purchase target could be expanded at the June meeting.

All sectors reported positive returns, spanning both economically-sensitive and defensive domains. Industries such as industrials and utilities performed remarkably well, while energy and consumer staples exhibited more modest gains. The Markit composite purchasing managers' index (PMI), which gauges the activities of the manufacturing and service sectors, climbed from 13.6 in April to 30.5 in May, signaling increased activity as lockdowns were eased. However, the index remained below the 50 mark, indicating contraction rather than expansion.

UK equities enjoyed gains in May, reflecting an improved investor sentiment, especially within economically-sensitive sectors. Notably, the mining sector thrived due to the resurgence of Chinese industrial activity. The UK government commenced the gradual relaxation of lockdowns, encouraging people to return to work, and confirmed the phased reopening of retail and schools. However, concerns over a no-deal Brexit resurfaced, causing the British pound to decline as the June deadline to extend the Brexit transition period approached. The possibility of negative interest rates was under review by the Bank of England, and the Debt Management Office introduced negative yielding gilts for the first time. The Office for National Statistics reported a 2% contraction in the UK's Q1 2020 economy due to Covid-19 lockdowns, marking the most significant GDP fall since the fourth quarter of 2009 during the global financial crisis. The preliminary estimate was more favorable than consensus predictions.

In May, the Japanese market displayed a steady ascent, concluding the month with a positive total return of 6.8%. The yen maintained relative stability, experiencing only a slight depreciation against the US dollar.

While global equity investors anticipated a revival in economic activity, uncertainties persisted regarding the trajectory of corporate earnings returning to a semblance of normalcy. In Japan, pharmaceutical stocks led the market's growth, followed by a brief resurgence in financial stocks, including leasing companies, and airlines that had faced significant setbacks during the pandemic. Small-cap stocks also exhibited a relatively strong performance, almost recuperating from their underperformance between January and mid-March.

While historical results took a backseat to forward outlooks, only a minority of companies provided guidance for the fiscal year ending in March 2021, as the fiscal year concluded in March.

Unlike the global trend, Asia ex Japan equities recorded a loss, with Hong Kong emerging as the poorest-performing market due to the proposed new national security law. Other Greater China markets, such as China and Taiwan, also incurred losses as tensions between Beijing and Washington escalated. However, India and Singapore also experienced losses, while a stronger-than-expected earnings season buoyed the Korean market. In contrast, ASEAN markets in Thailand and Malaysia recorded robust gains. Real estate and financials were among the sectors performing poorly, while healthcare and consumer discretionary sectors stood out as strong performers across the region.

Throughout May, growing investor optimism stemmed from the moderation of new Covid-19 infections and the easing of lockdown measures in various countries. Central banks reinforced their commitment to support measures, and Europe demonstrated progress toward coordinated fiscal support. Despite renewed tensions between the US and China, economic activity data displayed signs of improvement, and higher-frequency indicators indicated a less dire situation than initially feared.

The 10-year US Treasury yield remained relatively steady, closing at 0.65%. In contrast, European government yields witnessed notable fluctuations as discussions surrounding fiscal support measures unfolded. Germany's 10-year yield ascended from -0.59% to -0.45%, Italy's declined from 1.76% to 1.49%, and Spain's reduced from 0.73% to 0.57%. The UK 10-year yield marginally decreased from 0.23% to 0.18%, accompanied by a weakening pound. Shorter maturity UK yields even dipped below zero due to speculation about the potential for negative interest rates.

Corporate bonds outperformed government bonds, with high yield returning 4.5% and investment grade returning 1.3%. This positive performance was mainly driven by cyclical sectors continuing their recovery trajectory. Emerging markets bonds and currencies also generated positive returns, with higher-yielding markets leading the way, and currencies of oil-exporting nations experienced gains as oil prices rebounded.

In terms of indices, the MSCI equity index reported a return of 4.5%, while convertible bonds, as measured by the Thomson Reuters Global Focus Index, outperformed stocks with a gain of 5.4%. Despite the high volume of new issuances amounting to $26 billion, valuations remained subdued.