We all wondered where the sun went in May. It certainly shone on the equity markets, marking their recovery after a volatile month of April. Global equities rose by nearly 2,5% in euro, returning to or even exceeding the highs reached by the stock market indices at the end of March. The movements in the bond market were similar to those in the equity markets: rates had risen in April due to fears about inflation and changes in monetary policies, then stabilised after reassuring comments from Fed Chairman Jerome Powell.
A highly anticipated FOMC meeting was held on 1 May. While the Fed unsurprisingly kept its key rates unchanged, the markets were mainly wondering whether the institution would maintain its downward asymmetry. The question was legitimate given that the last three US inflation figures came out above expectations. As a result, the markets were mainly concerned about the fact that rate hikes were returning to the table. Fortunately, Jerome Powell reiterated that the Fed continued to see rate cuts on the horizon and that it was enough to keep rates at the current level in order to absorb the few wayward inflation points.
This clearly put a cap on rates and allowed equity markets to rebound after a period of volatility.
Moreover, inflation figures published in May were in line with expectations, which also helped to alleviate concerns. Core PCE inflation, excluding food and energy, stood at 2,8% and the consumer price index (CPI) fell from 3,5% to 3,4%.
While US growth remained robust, with low unemployment and real wage growth, Europe was not on the sidelines, with its PMIs and confidence indices showing steady improvement. Thus, after a positive surprise on growth in the first quarter (0,3% vs. 0,1% expected), growth expectations for 2024 have been revised upwards in Europe.
The other positive point for the European economy is fairly benign inflation at 2,6%, enabling the ECB to gradually unwind the restrictive monetary policy implemented since 2022.
In terms of investment strategy, it should be remembered that equities were overweight at the beginning of May following the episode of volatility in April. The equities purchased were mainly on the European markets, which offer several advantages: expected growth at the macro and micro level, an imminent first rate cut expected in June by the ECB and a good relative valuation level.
This purchase was financed by the sale of US Treasuries, which are becoming less attractive in an environment of strong growth and high inflation. With the help of respective inflation dynamics, the ECB is now closer to enacting a rate cut, which restores the image of European rates.
In terms of sectors, preference is given to aggressive sectors such as Consumer Discretionary, Finance and Communications Services. The aim is to be exposed both to a strong growth environment and to the artificial intelligence theme.
In addition, private debt remains a key element in portfolio construction as yield levels are particularly attractive.
