Monthly Commentary – May
As sentiment soured on the back of escalating trade tensions, global equities registered their first monthly decline this year. Investors worried about the outlook for the global economy as the US threatened new tariffs on goods from China and Mexico. A sharp fall in the pound boosted overseas returns for UK based investors, but this was not enough to prevent most markets losing ground in sterling terms.
In April, many thought that a Sino-US trade deal was imminent, but the prospect of a positive outcome soon dimmed in May. Accusing China of backtracking on previous agreements, President Trump increased the tariffs on $200 billion of Chinese goods. He then turned his attention to Mexico, threatening to ramp up trade tariffs if the flow of unauthorised migrants into the US was not stemmed.
Although the US Federal Reserve left interest rates unchanged, expectations are growing that rates could soon be cut. Markets currently indicate a high probability of at least one cut this year. In the UK, the cross-party Brexit talks broke down and Theresa May announced her intention to resign as prime minister. The pound, which has tended to reflect any perceived progress towards a workable Brexit outcome, weakened significantly.
In equity markets, there was a clear divide between defensive sectors, those typically more resilient to economic weakness, and sectors most dependent on global growth. The weakest area was information technology – a sector we believe to have been inflated by excessive enthusiasm and one that we avoid entirely. Other cyclical sectors declined too, including consumer discretionary, energy, materials, industrials and financials. The best performers were real estate and utilities, both of which typically benefit from lower interest rates and bond yields. Despite the Mexican standoff with the US, Latin America was the only region to record positive returns. The weakest regional returns came from Asia which is, so far, bearing the brunt of President Trump’s trade hostilities.
Fears about the health of the global economy also weighed on the oil price. This had a knock-on impact on our oil related investments. Conversely, the heightened anxiety amplified the attractions of gold. Several of our investments in gold mining companies performed well, including Newmont Goldcorp and Newcrest Mining. Both gained more than 10% over the month.
Another strong performer was Swedish telecom company Tele2, a recent addition to the portfolio. Tele2 operates throughout Europe, but most of its sales and earnings come from its home country, where it recently completed a merger with cable operator Com Hem. This is expected to offer significant financial benefits. Meanwhile, the merger of its Dutch operations potentially heralds an improving regulatory environment for the sector. In recent years, investors have demonstrated an inexhaustible appetite for digital media and technology companies, but we think they are overlooking the physical infrastructure on which these businesses depend. As the environment for telecom companies gradually improves, we see an interesting contrarian opportunity.
Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.
Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.