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Share markets around the world continue their positive momentum
Growing tensions in the Middle East in early June have led to some pullback in share markets following strong gains over April and May. While the situation remains fluid, the commentary below focuses on market performance and key developments over the month of May.
Key takeaways over the month of May:
Share markets performed well over May, continuing their recent positive momentum. At the same time, bond yields were mixed (yields move in the opposite direction to bond prices), reflecting ongoing uncertainty around inflation, and the outlook for interest rates.
While geopolitical tensions in the Middle East remain, they attracted less attention over the month. Until recently, the continued efforts to ease tension, including extending the ceasefire between the US and Iran and discussions to reopen the Strait of Hormuz, helped support investor confidence.
US share markets led the global rally over May. After a strong 10% (all returns are in local currency unless otherwise stated) gain in April, the S&P 500 Index rose a further 5.3% in May. Declining oil prices (due to easing geopolitical concerns) and positive earnings reports propelled shares higher.
The information technology sector was a standout, surging 16.0% over May and delivering a 56% return over the past 12 months. In contrast, the energy sector was the weakest over the month, falling 5.6%. Strong gains in technology helped push the S&P 500 Index to eleven new all-time closing highs over the month.
Micron Technology is currently one of the largest active positions (overweight relative to the benchmark weight) within the MAS Schemes’ broadly diversified international equities portfolio, which holds approximately 1,500 securities. The company designs and manufactures memory and storage chips and has benefitted from the growing demand linked to AI. While giving back some of its gains at the start of June, the company’s share price surged 88% over the month of May as analysts upgraded their earnings forecasts.
European share markets also performed well, with the broad-based Euro STOXX 600 Index gaining 3.2%. Similar to the US, technology led the way, gaining 11.5%, while the energy sector fell 12.9%.
Shares in the UK, as represented by the FTSE 100 Index, delivered a modest positive result. The Index gained 0.7% over May. Investors balanced easing geopolitical concerns against ongoing inflation pressures and domestic political disruptions. Prime Minister Keir Starmer faced a challenging month, as calls grow from within his own party for him to step down as leader. Pressure has intensified following the Labour party’s loss of a number of council seats at the local elections. This uncertainty added to concerns about the UK’s economic outlook and policy direction.
Share markets in Australia1 and New Zealand2 rose in May, gaining 1.2% and 2.6% respectively, helped by growing optimism around a possible easing of tension in the Middle East.
It was a busy month domestically, with company earnings updates, the Reserve Bank’s latest interest rate decision, and the Government’s Budget all in focus. The Reserve Bank left the Official Cash Rate unchanged, although the decision was more finely balanced than expected. A number of committee members voted to increase interest rates, suggesting rate rises can’t be ruled out in the near term.
The Government’s Budget was largely as expected, with continued focus on keeping spending under control. Updated forecasts from Treasury also suggest the economy may perform slightly better than previously thought, which could see the Government return to a budget surplus sooner than previously anticipated.
US bond yields moved higher over May, driven by inflationary concerns and geopolitical tensions, before easing late in the month. Long-term (30-year) US Treasury yields briefly pushed above 5% before easing over the back half of the month. In contrast, European yields were more stable and finished slightly lower overall. Kevin Warsh replaced Jerome Powell as the US Federal Reserve Chair, increasing the focus on the upcoming interest rate decision in mid-June.
In New Zealand, bond yields broadly followed global trends, rising earlier in the month before easing later on. The 10‑year government bond yield finished around 4.5%, similar to levels seen earlier this year.
The differing fortunes of various market indices are illustrated in the chart below.
Note: Returns are in local currency terms.
The recovery seen over April and May in global shares is not inconsistent with historical geopolitical episodes that show that share markets do not require full resolution of uncertainty to recover. Instead, they just need the confidence to reduce the probability placed on some of the most adverse outcomes. Ongoing momentum in the AI trade has also been a powerful supportive force too, especially in the US, but also pockets of Asia.
Are investors now being overly optimistic? Our lead investment manager’s (JBWere) assessment is nuanced. On the one hand, the AI theme once again commands strong attention and has clear momentum. Fundamentals are generally still very strong. Moreover, the global economy has continually reminded us of its resilience and ability to navigate shocks over recent years.
On the other hand, markets have recovered in part because they have priced out the worst-case outcomes. That means they are now more sensitive to any developments that might reintroduce those risks. The ongoing excitement around AI, and the phenomenal share price reactions in parts of the eco-system also mean expectations are high, lowering the bar to possible disappointments.
The investment landscape is full of crosscurrents that make it increasingly complex. There are several risks investors need to keep in mind. Markets are becoming more concentrated, geopolitical tensions remain, technology is changing quickly, and inflation and policy settings are still uncertain. Clearly the situation remains fluid and volatility is likely to persist. As always, our specialised investment managers have maintained a disciplined approach, ensuring that their investment processes are maintained.
Our MAS Advisers can help you make the most of your money. By planning ahead and considering your finances now, you can create the future you want. You can call us on 0800 800 627 or email info@mas.co.nz.
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1 As represented by S&P/ASX 200 Index.2 As represented by S&P/NZX 50 Index.
This article is of a general nature and is not a substitute for professional and individually tailored advice. No party guarantees the return of capital or the performance of investment funds. Returns indicated may bear no relation to future performance. The value of investments will fluctuate as the values of underlying assets rise or fall.
MAS is a financial advice provider. Our financial advice disclosure statement is available by visiting mas.co.nz or by calling 0800 800 627.
The Product Disclosure Statement for the MAS KiwiSaver Scheme is available at: MAS KiwiSaver Scheme. The Product Disclosure Statement for the MAS Retirement Savings Scheme is available at: MAS Retirement Savings Scheme. The Product Disclosure Statement for the MAS Investment Funds is available at: MAS Investment Funds. Medical Funds Management Limited is the issuer and manager of the Schemes.
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