May 2021 Review
Weather Report – April showers in May
Having witnessed a record dry month in April, we have just endured one of the wettest Mays on record – fortunately, the persistent precipitation abated in time for the bank holiday weekend. It’s almost as if April and May were the wrong way around and we had April showers in May. All of this could be a pointer to the consequences of climate change, but this spring’s weather variations were overshadowed by some significant events towards the end of May which may be a key indicator of what is to come.
The growing momentum behind climate change and energy transition was given a major boost by corporate actions in the final week of May. These three notable events happened – all on 26 May 2021:
Shell – Dutch court rules that Shell must cut carbon emissions by 45% by 2030.
Chevron – shareholders voted for a proposal to reduce emissions from the company’s customers. 61% of investors backed the proposal at the company’s annual investor meeting on Wednesday, rebuffing the company’s board, which had urged shareholders to reject it.
Exxon Mobil – Tiny activist investor Engine No. 1, with just a 0.02% stake and no history of activism in oil and natural gas, secured two seats on Exxon’s board. BlackRock Inc., the second largest holder of Exxon with a 6.6% stake, voted for three of the new directors nominated by Engine No. 1.
To paraphrase legendary recording artist Bob Dylan, who celebrated his 80th birthday on 24 May, ‘The times they are a changing’ – fast!
It is becoming more apparent to governments and relevant agencies that to get to net zero emissions by 2050, there is a need to act now to hit the 2030 targets set out in the timeline below sourced from Absolute Strategy Research.
Inflation – not a black and white argument
Much debate and column inches have been given to the resurgence of inflation, or its temporary rise before settling back down. Basically, it’s too early to make that call as much as financial media journalists love to cover the topic.
Clearly, we are witnessing inflationary pressures via supply bottlenecks and staff shortages in the restaurant and hospitality sectors as many of those previously employed there have sought more secure positions during the pandemic. The housing market remains buoyant. But what happens when the support packages end? Will consumers feel less confident? Will those that have over-ordered in an attempt to counter shortages revert to a more normal purchasing practice? What will happen in the UK housing market when stamp duty normalises.
The answer to all these questions is we don’t know despite the profilers on financial media channels having you believe it’s a binary outcome. Economic growth is rebounding strongly in Western economies, but the monetary data we look at suggests an unsurprising slowdown in the second half of 2021. Whichever way you look at inflation, bonds don’t look an appealing asset class. Central banks, led by the US Federal Reserve, are telling us that the current inflation pick-up is temporary. While they may reduce their asset purchases as economies sustain their recoveries, this is to be expected as the life support system is scaled back.
Singular data points proved unhelpful for economic forecasters as mixed data on employment and inflation announced in May created some market turbulence and it turned out to be another month of two distinct halves. The first half witnessed weaker equity markets before a stronger second half ensued.
Over the month, European (including UK) equities outshone other regions – especially Asia where India provided the best returns as investors looked beyond the Covid infection rates. Smaller companies led the way in the UK in contrast to the US, Europe and Japan where they were the laggards. The ‘value’ versus ‘growth’ debate remains, with the former edging the latter if those labels matter. Our focus remains on the longer-term demand themes rather than attempting to identify next month’s winners.
Sterling continued its strength, aided by a weaker US dollar, dampening non-sterling returns. Bonds had a mildly positive month overall as yield volatility subsided. Gold had a strong month, perhaps reflecting increased investor risk sensitivity.