Monthly Comment - May 2023
In May, political risks regarding the US debt ceiling overshadowed economic statistics. T-Bill and US Treasury bond rates initially reflected the risk of default but later declined as a political agreement was reached. Bond markets were negatively affected, with an average loss of nearly -2%, while equity markets showed mixed performance. The Nikkei increased by +7%, but the FTSE 100 declined by -5%, resulting in a -1% overall performance for the MSCI World index. International real estate securities experienced an average decline of -4.8%, with European listed real estate companies being hit harder at -7.8%. The S&P Commodities index declined by -6.1% due to concerns about the Chinese economic recovery. Despite these challenges, inflation, employment, and growth statistics did not significantly impact the ongoing stock market recovery.
May was significantly influenced by political risks related to the need toraise the US debt ceiling quickly to avoid a government default in June, rather thaneconomic statistics. T-Bill and US Treasury bond rates temporarily reflected thisinsolvency risk before declining towards the end of the month, when a politicalagreement was finally reached between Republicans and Democrats. During theperiod of uncertainty, the 10-year rates increased from 3.42% to 3.85%, while 1-month T-Bills surged from 4.2% to 5.74%, before falling to 5.13% at the end of themonth. This uncertainty weighed on bond markets, with an average loss of nearly-2%, while equity markets showed more varied performance, such as the +7%increase in the Nikkei and the -5% decline in the FTSE 100, resulting in an overall-1% performance for the MSCI World index. The rebound in interest rates had animpact on international real estate securities, which experienced an averagedecline of -4.8%. European listed real estate companies experienced a moresevere shock (-7.8%) and retested their lowest levels of 2022. As for commodities,the -6.1% decline in the S&P Commodities index mainly reflects investors' loss ofpatience with the Chinese economic recovery, which has not been clearly evidentand has pushed energy (-8.4%) and industrial metals (-6.7%) prices down. Allasset classes were penalized during the month, although inflation, employment,and growth statistics did not provide sufficient new sources of tension to questionthe ongoing stock market recovery.The rebound in rates in May in most countries is only partially justified byinflationary concerns in some countries. On the contrary, it seems mainly linked tothe US debt ceiling issue, which temporarily pushed US Treasury yields higher.The resolution of this uncertainty should lead to a new phase of downwardadjustment in US yields starting in June, especially if the May inflation datapublished in June is close to the current expectations of barely +4% per year. Withinterest rates at 5.25%, they would be 125 basis points above annual inflation,reinforcing expectations of a future easing of the Fed's monetary policy.The risk scores for equity markets are generally unchanged in this context oftemporary yield curve tensions. A generally positive earnings season, prospectsfor downward yield adjustments, and a possible easing of monetary policy shouldbe the main factors supporting a continuation of the upward trend in markets.Japan's risk score is moving into the danger zone, while the United States,Canada, and emerging markets are in the low-risk zone.Uncertainty and disappointments related to the Chinese recovery are affecting theperformance of the energy (-8.4%) and industrial metals (-6.7%) segments. Thesegment continues its downward trajectory, plunging by -6.00% in May. Since thebeginning of the year, the star sector of 2022 has accumulated a loss of -12.91%over 5 months.The real estate segment, which was affected by credit access concerns during thebanking crisis in March, is still struggling to recover from this disruption and isenduring the short-term rise in interest rates. The international segment declinedonce again in May (-2.46%), further reinforcing the cumulative negativeperformance since the beginning of the year (-3.36%). However, the situation isdifferent in Switzerland, where performance remained positive in May (+0.35%).
