Written by Anthony Walters, Clever’s Head of ESG, this monthly market review offers insights into the most notable and impactful events in global financial markets over the last month.
- MSCI Japan index at all-time high
- Volatility at lowest level in 3 years
- US agrees to borrow more and extend $31.4 trillion debt ceiling
Markets were mixed in May, with the Balanced portfolio benchmark returning -0.96%. News of a possible US default dissipated as US Congress agreed to borrow more than the current $31.4 trillion debt ceiling, with little said about how this trend will be reversed in future. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit.
Does government debt matter? It should, but public spending is an unstoppable force that is also used as a political tool. Increasing the tax base is another tool used to pay for public spending, although one less popular. Ultimately, future populations will pay for the rise in borrowing today, which is a key reason why population growth is vital to the future health of an economy.
Source:tradingeconomics.com, June 2023
Of the 12 largest debtors, Japan and the US have the greatest GDP (or annual income) in nominal terms. So, the economic actions of these nations are likely to have the greatest impact on investment markets.
The United States sits in 11th place for debt relative to GDP, a league table topped by Japan with an incredible 264%. Speaking of the debt burden for future populations, by the year 2100, the US population is projected to grow by almost 16%. In stark contrast, the Japanese population is projected to decline by 40%. This suggests that the US has further to go in terms of ability to accommodate a huge debt pile, although its trajectory must surely slow at some point.
Volatility.
Despite a brief spike in the Volatility Index in May (to 20.63), volatility continued to decline for the rest of the month and as of the start of June, the Index closed below 14 for the first time in over 3 years. The last time volatility was this low was in December 2019.
Leading Economic Indicators.
In the UK, the Services PMI (Purchase Manager Index) showed growth, with a reading of 55.2 compared to a prior reading of 55.9 (a reading above 50 signifies growth). Manufacturing fared less well with a reading of 47.1, signalling contraction. This continues the trend seen since July 2022, the last month in which growth in manufacturing was reported.
The Eurozone Manufacturing PMI came in at 44.8 in May 2023, slightly up from a preliminary estimate of 44.6. The latest PMI reading signalled a further decline in the health of the bloc’s manufacturing sector, and one that was the steepest in three years. The Eurozone Services PMI was 55.1 in May but continued to point to strong growth in the sector.
In the US, the Manufacturing PMI was 48.4 in May, driven by a solid contraction in new orders amid muted demand conditions. Efforts to run down stocks were met by a steeper contraction in purchasing activity, hinting at lower production growth in the coming months. The US Services PMI was 54.9 in May but continued to point to the strongest expansion in the sector since April 2022, mainly supported by new business.
Inflation and Interest Rates.
UK inflation rose by more than the market expected with the Consumer Prices Index (CPI) increasing by 8.70% in the 12 months to April 2023, down from 10.10% in March. The governor of the Bank of England (BoE) has conceded there are “very big lessons to learn” in setting monetary policy after the BoE failed to forecast the recent rise and persistence of inflation. Andrew Bailey told the House of Commons Treasury select committee on Tuesday that the bank’s own forecasting model was not delivering accurate results and the committee had reduced its role when setting interest rates.
In Europe, inflation lowered from 7% to 6.10% but European Central Bank president, Christine Lagarde, said in a speech shortly after the data was released that inflation was still “too high” and more interest rate rises were needed to bring it down to its 2% target.
In the US, the latest inflation reading came in at 4.90%, a clear sign that the swift response by the US Federal Reserve to raise rates, is paying dividends sooner than action taken by other developed nations.
Market performance.
Japan led developed markets this month with a 2.70% gain. Various Japanese indices are breaking out to new highs and the MSCI Japan Index is now at an all-time high (in local currency) and less than 2% away from the same in Pounds Sterling. Despite this, the MSCI Japan ETF is priced at a relatively modest P/E (Price to Earnings) ratio of 14, compared to the MSCI USA ETF which is priced at 20 times earnings.
The USA and UK indices returned 1.66% and -5.25% respectively, the latter more reliant on commodities and financials, which have stumbled in recent times.
Greece led the emerging markets, returning 10.39%, followed by Taiwan (8.44%) and Korea (5.87%). The other end of the performance table featured China, Czech Republic and South Africa, who were down 7.42%, 12.13% and 12.95% respectively.
Sector performance.
Technology & Technology Innovation gained 10.39% for the month, almost 3 times as much as the next best performer, India/Indian Subcontinent (3.74%).
Commodity/Natural Resources, UK Index-Linked Gilts and China/Greater China were the 3 sector laggards, returning -5.85%, -5.97% and -8.48% respectively.
Source: tradingeconomics.com, June 2023
Summary.
In the end, the debt ceiling seemed to matter little to investors, as markets continue to progress. The US can continue to borrow for as long as there are enough taxpayers available to foot the bill. As demonstrated, future taxpayers are vital to this exercise.
Although some markets are moving sideways, some are reaching 52-week highs and Japan is powering ahead on the premise that this time really is different. Furthermore, corporate culture continues to progress and Japanese corporations themselves are delivering better results, which are being applauded by the market.
Central banks are, unsurprisingly, “central” to market movement in the coming months, with investors closely watching the words of banking leaders around the world, for signs of peak interest rates and the cooling of inflation.
Sources: Anthony Walters – Head of ESG at Clever Adviser Technology Ltd (Clever), ‘Mixed Investment 20-60% Shares’ sector performance, May 2023, US Treasury Department, 2023, Yahoo finance, 07/06/23, Markit economics & Trading economics, 07/06/23.
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