May 2022 Review

By Paul Sedgwick – Portfolio Advisor

Dear Partner

Despite little improvement in the outlook for the global economy, stock and bond investors have had a respite from falls that both asset classes endured from the start of the year. At one point, the S&P 500 suffered its longest negative run for over 50 years.

Better than expected US consumer reports, along with receding inflation expectations for the year ahead, helped improve sentiment that was indeed close to rock bottom. World trade flattened in Q1 after the strong recovery last year. As opposed to recent months when inflationary pressures were driven by demand and a lack of supply, indications are that softer demand rather than supply is the reason for the weakness in global trade. The latest Purchasing Manager Surveys underpinning this view. US treasury yields fell in May; the ten year US treasury having hit 3.1% this month, rallied back to 2.75% at one point.

Total Return Balanced and Total Return Equity Portfolios

The portfolios appreciated modestly in May, assisted by a broad recovery in capital markets from the lows. VMWare received an approach from Broadcom at a 25% premium to the price, which we accepted and traded out of the position. The offer is likely to contain cash and an element of Broadcom stock, which we had no particular view on. We added Estée Lauder to the portfolio, after a near 40% fall in the share price in the past year that brought the valuation closer to historic levels. We added to the fixed income element of the portfolio, including the BlackRock iShares GBP corporate bond fund, after the recent fall in price the portfolio of over 400 corporate bonds offers a yield of 3.5%, which was added to the Total Return Balanced Portfolio. Additionally, at the start of the month, we added to our short-dated gilt position in both Total Return portfolios. Overall, the net effect is to bring down the cash element of the portfolio.

The outperforming stocks this month were Burberry, after a better earnings report, Shell continues to benefit from a strong oil price. British American Tobacco continues its strong performance as the yield and defensive qualities attract investors. Nestle and Diageo share prices appeared impacted by the weak reports from US retail chains, and possibly valuations getting a little stretched.

Market Overview

Looking forward to the second half of the year, if inflation expectations continue to ease and growth forecasts weaken, there will be room for central banks to turn more dovish. Which in turn should help support both bond and equity markets. Valuations, in particular of US shares, are far closer to historic norms, partly based on what some may consider a continued optimism for earnings for this year.

Much of the revaluation in asset prices is so far more related to higher bond yields. Encouragingly, historically earnings have held up during periods of inflation. The second quarter earnings season begins in early July.

As we pointed out at the start of this report, sentiment for equity markets had become incredibly negative so something of a relief rally was on the cards. The economic picture is uncertain as central banks remain under pressure to taper demand in an attempt to ease inflation rates closer to target levels. The economy is also feeling the consequences of our efforts to pressure the Russian government to bring the conflict to a close.

Bear markets are littered with bull rallies, but we are great believers in the concept that the worst of times are the best of times, to quote Dickens. In a carefully managed portfolio, one gets opportunities to add to positions at appropriate times and include new ones for the future benefit of the portfolio. See factsheets for the latest performance figures and how we compare to our peer-group.

Yours sincerely

Cube Capital