US debt ceiling negotiations became the focal point of financial news and dominated the thoughts of asset allocators worldwide during May. Whilst historical precedent indicated that these discussions would ultimately be resolved without major consequences, the evolving status of the negotiations created market distortions and added to the growing uncertainty. Investors anxiously followed the ebb and flow of apparent progress as the potential default date drew near.
Fortunately, by the end of the month, progress was made on the Biden-McCarthy deal, seeking to temporarily suspended the debt ceiling until 2025, extending beyond the next presidential election. As of the time of writing, this legislation has successfully passed the House and is now heading for the Senate, with just days remaining before the June 5th default deadline.
Despite the positive development on the debt ceiling issue, broad market sentiment remained weak as indicated by investor surveys. However, rather ironically, the US market managed to outperform most other major regions during this period of uncertainty. It is no secret that the extreme performance of a handful of the largest companies by market capitalization have been driving performance in recent months within the US market.
The dominant theme that has captured the attention of investors is a belief in the power of artificial intelligence (AI) and its potential to disrupt the global economy and the market’s faith in AI’s transformative capabilities was exemplified by the significant increase in the share price of Nvidia in the last week of the month. The company’s anticipation of revenue growth far beyond analyst estimates, driven by the increased supply required to meet the soaring demand for AI chips, has propelled its stock to new heights. This contrasts with the cyclicality of technology sales, particularly with sales declining faster than costs of late.
Shifting focus to the global economic landscape, headline rates of inflation across developed Western economies have been declining from their peaks. However, progress in taming inflation has been sluggish and levels remain significantly above central bank targets. Adding to the concern, unemployment rates have remained historically low, providing central banks with ample justification to maintain their restrictive policy stances, at least for the time being.
UK 10 year benchmark yield
In the United Kingdom, the release of inflation data for April concerned the bond markets. Whilst the headline inflation rate decreased, core inflation (excluding food and fuel) unexpectedly surged to a new 31-year high. Typically, core inflation lags behind headline rates at inflection points, but the bond market reacted poorly to the news. Rate expectations for the Bank of England were promptly reassessed, pushing longer-term yields notably higher. However, when considering inflation more broadly, the supply shocks experienced in recent years, such as the disruptions to supply chains caused by the COVID-19 pandemic and the energy supply shock triggered by the Ukraine-Russia war, are gradually dissipating. As these pressures subside, there is potential for inflation to decline rapidly from its current levels.
Fund Name Changes
On 31 May 2023, the T. Bailey Dynamic Fund and the T. Bailey Growth Fund underwent name changes to the T. Bailey Multi-Asset Dynamic Fund and T. Bailey Global Thematic Equity Fund, respectively. These name changes were implemented to provide investors with a more descriptive understanding of the funds and to align them logically within our product range. Importantly, it is crucial to note that the objectives of the funds, their risk profiles, and the way they are managed will remain unchanged.
May was a relatively uneventful month overall for currency markets. Sterling experienced a slight weakening against the US dollar but strengthened against the Euro and Japanese Yen.
Japan emerged as the best-performing equity region for the month. The Topix index rose 2.4% in Sterling terms, propelled by optimism fuelled by strong private consumption and an acceleration in inflation. These factors suggested a potential path out of the deflationary stagnation that has characterized Japan in recent decades. Additionally, record net purchases by foreign investors in recent weeks provided further support to the Japanese market.
The US market followed closely behind, supported by the forementioned narrow leadership of the largest tech stocks and the anticipations of future growth potential in the field of AI. Despite the prevailing market uncertainty, investors continued to express confidence in the long-term growth prospects of AI technology and its potential transformative impact on companies engaging with it.
In contrast, China’s performance disappointed as survey data suggested moderating economic activity and a weak property market.
China’s sluggish economic growth this year, coupled with the generally weak global manufacturing sector, has contributed to a decline in cyclical demand for raw materials, leading to a decline in the price of industrial metals. Meanwhile, gold remained relatively stable.
In the debt market, Gilts underperformed during the month due to concerns over core inflation. but elsewhere moves were modest.