Monthly Commentary – May 2021

Amid rising expectations of higher inflation and interest rates, global markets fell back a little in May. Shares in companies that benefit from the prospect of higher rates performed well, as did gold-related stocks. Beneficiaries of economic reopening were also strong.

The prospect of higher inflation loomed larger as many consumer-facing companies warned that supply shortages and logistical logjams might force them to raise prices. Survey data pointed to diminishing inventories of inputs such as steel, lumber, cotton and semiconductors. European and US manufacturers reported record backlogs and higher input prices as they scrambled to keep up with accelerating demand. Meanwhile, official reports confirmed that inflation had outstripped forecasts, prompting fears that central banks might raise interest rates. Such an environment tends to be bad news for the popular growth stocks that have been market leaders in recent years.

In the US, President Biden’s $4 trillion vision of reshaping the federal government’s role in the economy is now in the hands of Congress where some compromise may be necessary. The package would add to the inflationary pressures that are already building.

Janet Yellen, the US Treasury Secretary, acknowledged these pressures, saying that interest rates might have to rise modestly to keep the US economy from overheating. However, Government and Federal Reserve officials declared that this year’s price increases would prove transitory.

The oil price rose as reserves accumulated during lockdowns declined. In the US, gasoline prices now exceed $3 a gallon, the highest level in almost seven years. After a ransomware attack forced the shutdown of a key gasoline distribution pipeline for several days, some US states faced major shortfalls.

Latin American markets rebounded strongly over the month as Brazil’s economy grew faster than expected in the first quarter and the rise in the country’s consumer price index was less pronounced than feared. Markets in the UK and Europe also delivered positive returns. In Europe, an agreement which allows quarantine-free travel within the EU-bloc offered some relief for the region’s battered tourist industry. The weakest region was North America where technology-related stocks declined.

One of our best performers during May was Royal Mail, whose full-year results were well received by the market. We believe that the stars are aligning for Royal Mail to allow it to escape past challenges. Growth returned as parcels became a larger part of its business mix due to the surge in online activity, a trend that has accelerated over the last year. Thanks to its recent share price performance, Royal Mail is now on the cusp of being added to the FTSE 100 index.

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.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.