Macro views

Market Reviews - GBP (May 2020)

A roundup of factors affecting regional equity and bond markets over the month
June 2020
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Past performance is not a guide to future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

UK

The FTSE All-Share Index advanced 3.4% in sterling terms during May, though trailed the global average. Sterling weakened given faltering Brexit talks and reports the Bank of England was beginning to consider the possibility of cutting UK interest rates to below zero. The UK announced plans to begin a phased reopening of shops and schools in June as COVID-19 deaths and new infections slowed. Official figures showed the economy contracted 1.6% year on year in the first quarter. Survey data pointed to further declines in manufacturing and services activity in May following record falls in April. The government announced its COVID-19 job retention scheme, supporting over 8 million workers, would end in October. In terms of sectors, leisure goods (30.5%) and mobile telecommunications (18.3%) outperformed, while oil equipment, services & distribution (-6.9%) and banks (-6.4%) lagged.

Risk Disclaimer

The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested.

 

FTSE All-Share Total Return (TR) GBP (%)*

FTSE All-Share Total Return TR GBP % - May

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

Europe

The FTSE World Europe ex-UK Index rose 8.3% in sterling terms, with returns for UK-based investors boosted by weakness in the pound versus the euro. Survey gauges pointed to some improvement in eurozone business sentiment in May as Covid-19 lockdowns eased, though overall business activity measures pointed to further contraction. Fears grew over the prospect of deflation across the eurozone, with official estimates putting eurozone inflation at just 0.1% in May versus 0.3% in the prior month. France and Germany proposed a €500bn EU-wide COVID-19 recovery plan, with hard hit eurozone members to be offered grants from funds raised through European Commission borrowing in capital markets. Germany’s constitutional court ruled that German authorities had not properly scrutinised European Central Bank quantitative easing measures dating back to 2015.

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FTSE World Europe ex UK TR GBP (%)*

FTSE World Europe ex UK TR GBP % - May

US

The FTSE All-World North America Index gained 7.2% in sterling terms over May, continuing to rebound from the March sell-off. US states began reopening their economies amid hopes that COVID-19 case numbers had peaked. However, towards monthend US cities were rocked by protests and riots in response to police brutality and the death of George Floyd. Figures showed US unemployment surged to 14.7% in April versus 4.4% in March as COVID-19 lockdowns hit the economy. Data also pointed to record falls in US industrial and retail activity in April. The Federal Reserve kept monetary policy on hold though stressed it was prepared to take further action to help the US economy navigate the COVID-19 crisis. The House of Representatives backed an additional $3tn relief package though Republicans vowed to block the bill’s progress in Senate.

FTSE All-World North America TR GBP (%)*

FTSE All-World North America TR GBP % - May

Japan

The FTSE Japan Index returned 8.2% in sterling terms during May, with Japanese equities outperforming the global average. Prime Minister Shinzo Abe claimed Japan had brought its COVID-19 outbreak under control as the government ended a 7-week state of emergency. The Abe administration approved a further $1.1tn in COVID-19 relief measures, significantly improving on the fiscal response it agreed in April. Japan officially entered recession, with the economy shrinking by an annualised 3.4% in the first quarter following the 7.3% annualised contraction in the prior quarter. Japanese firstquarter corporate profits dropped at the sharpest rate in over a decade. Industrial production and retail sales both plunged by over 9% in April as COVID-19 sapped demand. Japanese inflation sank to just 0.1% in April versus 0.4% in March.

FTSE Japan TR GBP (%)*

FTSE Japan TR GBP % - May

Emerging Markets

The FTSE All-World Emerging Index returned 3.0% in sterling terms over May. Russia (11.2%) and Brazil (10.3%) were among the top-performing global markets, finding support from a rise in oil prices over the month. Brazil’s central bank lowered interest rates by 0.75% to just 3%, a record low. Chile (-2.8%) and India (-0.4%) both underperformed amid worsening domestic economic data and rising COVID-19 cases. The Reserve Bank of India cut its benchmark repurchase rate by 0.4% to 4%. Having previously reported a significant contraction in first-quarter GDP, China said it would abandon its annual growth target, formerly set at 6%. China’s PMI manufacturing survey gauge surpassed expectations in May, moving into expansion territory as COVID-19 restrictions eased. Chinese exports for April rose ahead of estimates though remained well below December’s levels.

FTSE All-World Emerging TR GBP (%)*

FTSE All-World Emerging TR GBP % - May

Asia Pacific ex Japan

The FTSE World Asia Pacific ex Japan Index returned 2.5% in sterling terms during May, lagging the global average. Australia (7.6%), Malaysia (6.6%) and Thailand (6.5%) outperformed, supported by higher commodity prices and easing COVID-19 restrictions. Hong Kong (-5.6%) sharply underperformed after China imposed a national security law on the territory, raising fears over its future as a leading global financial centre. President Trump said he would seek to end Hong Kong’s special status in trade and travel given the new law. Fears over rising tensions between Beijing and Washington held back Asia Pacific ex Japan markets such as Singapore (-0.5%) and Taiwan (-0.5%). China said it would abandon its annual growth target, previously set at 6%. The country’s PMI manufacturing survey gauge rose ahead of expectations in May, moving into expansion territory.

FTSE World Asia Pacific ex Japan TR GBP (%)*

FTSE World Asia Pacific ex Japan TR GBP % - May

Government Bonds

Overall, global government bond yields were little changed over May. While economic activity and inflation continued to decline across developed economies, risk appetite was generally buoyant as COVID-19 lockdowns and restrictions eased. Certain shorter maturity US treasury yields hit record lows against the increasing prospect that US interest rates could eventually turn negative. Elsewhere, the UK government was able to complete
its first ever sale of negative-yielding bonds, with the yield on some shorter maturity gilts dropping into negative territory. The Federal Reserve kept monetary policy on hold though stressed it was prepared to take further action to help the US economy navigate the COVID-19 crisis. Germany’s constitutional court ruled that German authorities had not properly scrutinised European Central Bank quantitative easing measures dating back to 2015.

Corporate Bonds

Global corporate bond spreads narrowed over May, with credit continuing to recover from March’s sell-off. A general easing in COVID-19 restrictions helped buoy risk appetite, while some improvement in oil prices over May provided respite for the energy sector. Figures showed US unemployment surged to 14.7% in April versus 4.4% in March as COVID-19 lockdowns hit the US economy. Data also pointed to record falls in US
industrial and retail activity in April. Lower gasoline prices saw US headline inflation plunge to just 0.3% in April from 1.5% in March. Survey gauges pointed to some improvement in eurozone business sentiment in May as COVID-19 lockdowns eased, though overall eurozone business activity measures pointed to further contraction. E-commerce giant Amazon.com took advantage of record low yields to issue $10bn worth of debt.

*Source: Lipper to 31-May-20, total return. Indices rebased to zero at 30-Apr-20.

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