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May has seemed relatively calm compared to the chaotic backdrop that we witnessed in April. In fact, the month was going reasonably smoothly until out of the blue Donald Trump announced negotiations with the EU weren’t going particularly well and that 50% tariffs would be introduced from the start of June. As usual a partial climbdown through an extension was quick to follow. Even more confusion was added to the equation at the end of May when a panel of judges in the US ruled the tariffs illegal.

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Trump's continual U-turns over trade policy is resulting in ongoing market volatility with tough talking leading to market falls and subsequent backtracking leading to markets recovering. China is clearly one of the main targets, and exports to the US fell by 21% in April though this did follow a spike in March. China posted a record trade surplus with the rest of the world in 2024 of $1 trillion and appears to be holding its own in the trade war at the moment.

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Away from tariffs and back home there has been some positive economic newsflow with trade deals announced with the US, India and the EU last month. UK GDP grew by 0.7% in the first three months of the year, partially driven by exports prior to US tariffs being imposed. March’s reading of 0.2% growth was also better than expected and UK retail sales rose strongly in April by 1.2%. It will take a good few months for the longer-term impact of these and for anomalies to wash through. Having said that after Japan’s surprise contraction, the UK has the best growth in the G7.

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In terms of interest rates, the Bank of England trimmed rates by 0.25% last month to 4.25%, UK wages and inflation offered a mixed picture so May’s quarter point rate cut might be the last in a while. The Fed continues to watch and wait to assess the impact of President Trump’s tariffs. Expectations for US rate cuts this year keep falling with only a single cut now pencilled in for 2025 with most market commentators. Although there was no change in Europe, markets are expecting that there will be a further 0.25% when the ECB meet on 5th June, meaning European borrowing costs will have halved to 2% over the past year.

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Inflation is still the key number most bankers are watching and the latest reading of Eurozone inflation at 2.2% is allowing the ECB to cut rates decisively. The US recorded a surprise dip in April to 2.3% - the lowest reading since early 2021. The UK is heading the other way with a sharp rise to 3.5%, which came in above analysts’ forecasts: household bills were to blame.

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Finally, the Indian economy surpassed Japan to become the world’s fourth largest by GDP with a total of $4.19 trillion, however it’s clearly got much further to go before it catches Japan’s GDP per head of $33,766 and in 2023 India’s was $2,408!

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Market Watch

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Turning to markets first and there was no sign of “Sell in May” for stockmarket investors. The MSCI World index gained 5.9% and May provided a reminder not to write off US led tech stocks as a shift in sentiment back to “risk on” saw a monthly 10% gain for the Nasdaq 10%. The FTSE gained a creditable 3.8%, however it was the German DAX that set new all-time high records after gaining 6% in May.

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In fact, wherever you looked equity markets were in the ascendency. However, such positivity all seemed to hinge on Donald Trump’s mood especially around hopes for a trade deal with the EU and China. The rise and fall in markets based on Trump’s pronouncements is getting quite wearisome and it feels like the best strategy is to ignore the noise and position for the longer term. The outlook is more nuanced than probably any time of the last decade and it’s unlikely one investment market or style will rule the immediate future like US high growth stocks did over the past decade.

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Turning to bond markets and Government bonds were firmly in the crosshairs last month with Moody’s historic downgrade of the US credit rating – US debt no longer has a AAA rating from any of the big three ratings agencies. On the back of the downgrade and tax cuts the US ten-year treasuries finished May paying 4.4% up from 4.16% Whilst the UK wasn’t downgraded last month, chancellor Rachel Reeves has other problems as borrowing in the year to 31 March 2025 was £11 billion higher than forecast. The UK ten-year gilt had a similar move after starting May at 4.44% and finished the month with a yield of 4.65%. Germany’s ten-year bond was fairly flat, but the equivalent JGB jumped and now yields 1.49%.

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In contrast commodity markets were relatively calm. An ounce of gold was flat on the month, starting at $3319 and finishing at $3315. The price movements of a barrel of Brent oil were also subdued, rising less than $1 in May to finish at $63.90.

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On the currency front the pound had a good run on stronger data and the dollar weakened after the US congress passed President Trump’s tax and spending bill or more accurately the “add to the credit card bill” Bill. Sterling gained almost 1% against US dollar and Euro and 1.71% versus the Yen.

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Fund Watch

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Looking at funds and sectors first and it was a risk on month with technology funds leading the charge. The IA Technology sector gained 8.95% - behind the return of Nasdaq, as a strong pound was a headwind for UK investors holding funds invested overseas. The more interesting top spots went to smaller companies with UK Small Cap, European Small Cap and North American Smaller Companies sector all featuring in the top five sectors in May. The Mansion House Accord possibly helped UK smaller companies with rumours about increased allocation to UK small caps by pension funds.

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From an individual fund perspective, it was the high growth and tech names that prospered. Stalwarts like bull run junkies Morgan Stanley INVF US Growth featured at the top of the tables – that fund gained an impressive 14.58%. Polar Capital Global Technology also featured as top holding Nvidia released more strong results. Perhaps the biggest surprise in the top ten was Alliance Bernstein’s Sustainable Climate Solutions fund which gained 12.4%.

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At the foot of the table bond sectors were prominent. However, it was the Healthcare sector that propped the sector table with the average fund falling almost 4%. There doesn’t appear to be any specific reason for the malaise, but the sector remains unloved. However, it was JPM Emerging Europe propping the tables with a fall of 6.5% as hopes of an imminent ceasefire and end to hostilities in Ukraine faded.

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Turning to investment trusts and with no takeovers last month (unless any slipped through the net) it was Seraphim Space going interstellar with a rise of 41% and in the process hitting a 12-month high. Rate cuts should help the embattled infrastructure sectors and Hydrogen One came second gaining over 30% however for context the share price is about 26 pence having listed at £1 a few years back. Not a great investment thus far. From a sector perspective there was a mixed bag with the Financials & Financial Innovation sector leading the way with a 14% gain.

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Manager watch

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In recent meetings fund managers across all asset classes and markets are trying to understand the implications of Trump’s tariffs. Whilst markets have proved remarkably resilient following the initial sell off early in April, a meeting with an inflation expert at Pimco provided a reminder of potential headwinds. Their structural view is that inflation will be higher and more volatile than priced in by markets. With de globalisation and net zero ambitions both inflationary. At the time of the meeting their base case is that US growth will be zero for 2025 with 50% chance of recession, whilst headline inflation could be 3.5%-4% by end of the year (based on a mild Trump tariff scenario!).

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Whilst May’s performance has shown you cannot write off US growth stocks, we are seeing a number of fund managers who are extolling the virtues of their dividend focused funds. According to Newton, high yielding stocks are at historical discounts to growth stocks trading at levels not seen since just before the bursting of the tech bubble in 2000. We would agree that dividends are likely to be more important for stockmarket investors than they have been over past decade; more like the previous 30 years where compounding income was a key driver of total return from equities.

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Finally, the biggest news of the month in the fund management World was the much-revered fund manager Warren Buffett announcing that he was stepping down from Berkshire Hathaway at the end of the year. Under Mr. Buffett’s stewardship Berkshire Hathaway has seen a phenomenal annual growth rate of almost 20% - the power of compounding over 60 years at that rate is huge: $1000 turned into $56 million!

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Important Information

This document is produced by Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided do not constitute a personal recommendation to deal. Any statements, opinions, forecasts, and figures are made by Fairview Investing (unless otherwise stated). They are considered to be reliable at the time of writing but may be subject to change.

Fairview Investing accepts no legal responsibility or liability for the content of this material. The contents of the document are not to be re-produced or circulated without the express permission of Fairview Investing Ltd. Fairview are independent investment consultants sitting on the Investment Committee of EXE Capital Management.

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