In our first newsletter of the year, we said that “we remain cautiously optimistic that 2017 will deliver solid returns to global share market investors.” As we reach the mid-point of the year stocks have already had a strong year notwithstanding some severe political turbulence on both sides of the Atlantic. We think there are further gains to come in 2017 (albeit most likely to be at a slower pace than the first 5 months of the year) as it is earnings and economics that ultimately determine the direction of markets both of which are, in a global sense, in good health at present.
When looking at where the strength in stock markets has come from so far in 2017 it is interesting to note that in early June just 5 big tech companies (Alphabet, Amazon, Apple, Facebook and Microsoft) had contributed approximately 30% of the S&P500’s rise year to date. This has been beneficial to the growth funds as we tend to have a large exposure to the tech sector.
More recently the tech sector has seen some profit taking but we continue to hold our positions given tech’s robust earnings momentum, it being a significant beneficiary from late-cycle capital spending and the potential for a cash repatriation tax holiday that would disproportionately benefit tech, given its huge cash piles held overseas.
Following is a recap of market movements in May
Global equities pushed higher again in May with the MSCI All Country World Index gaining 1.3% (in local currency). This is the 7th consecutive month of positive returns for the Index and it is up 7.7% year to date. All of the major regions around the world delivered the strongest earnings growth seen in several years. This created bullish sentiment and helped drive share prices higher in the face of political ructions in the US, the UK, and Brazil (to name a few).
Stocks advanced in the US in May with the S&P500 gaining 1.2%. The market was hit by a bout of risk aversion mid-way through the month as the drama around the investigation into Russia’s election meddling escalated. When President Trump fired the head of the FBI James Comey speculation arose that the reason for the dismissal was because Comey was effectively leading the investigation into the Trump election campaign’s ties with Russia. Investors are concerned that the White House will become bogged down in the investigation which could hinder its ability to push through its agenda of tax cuts, infrastructure spending and deregulation all of which should be positive for equities. Nevertheless, markets recovered strongly with the S&P500 closing the month near its highs.
In Europe, stocks had a strong start to the month as solid economic data and the victory in the French Presidential election of pro-Europe centrist Emmanuel Macron soothed investor nerves. However, some of these gains were erased in the second half of the month as the Euro gained strongly which hurts the earnings of exporters. The Bloomberg European 500 Index closed the month 1.0% higher.
Emerging equity markets had another postive month with the MSCI Emerging Markets Index returning 2.3% in May (in local currency). The Index is now up 12.4% year to date handily outperforming its developed market counterpart.
The Australian share market put in the weakest performance of the markets that we actively monitor. Australian bank stocks sold off sharply after the Government announced it would impose a levy on the liabilities of the four major banks and Macquarie Group in order to help repair the country’s budget deficit.
Back home and the NZ50G continued its run of positive monthly returns with a gain of 0.5%. The May reporting season was a touch underwhelming but solid enough to see share prices nudge higher over the month.
