Developed Markets Continue to Climb
In the month of May, international developed stock markets recorded a return of 4.25%. Japan and Europe ex UK recorded returns of 5.92% and 5.68%, respectively. The U.K. and Pacific ex Japan equity markets lagged the broader market. After the market declines in March, international developed markets are down -14.42% year to date. Both monetary and fiscal stimulus have contributed to the market rally. Governments and their central banks continue to address liquidity concerns in the financial markets through bond buying programs and lowering interest rates. The U.S. government is also considering another round of fiscal stimulus.
Russia and Brazil Bounce Back
Broader emerging markets posted a 0.95% return for the month. Russia and Brazil recorded returns of 8.61% and 8.52%, respectively. India and China lagged other markets in May. The Chinese equity market has outperformed other emerging and developed equity markets year to date except the U.S. equity market. With many countries easing social distancing requirements, business activity has slowly picked up.
Information Technology Holds Steady
Materials and information technology recorded returns of 6.63% and 6.61%, respectively. Energy and financials lagged other sectors in May. Information technology continues to lead the way as the products and services of many technology companies were instrumental in helping people and businesses operate like under normal economic conditions. Video conferencing and delivery services saw large increases in usage.
Small-Cap Stocks Underperforming
In May, value underperformed growth in the small-cap space and large-cap space. Momentum recorded a gain of 6.84%. Relative valuations between value stocks and growth stocks are close to historical highs based on the price-to-book valuation metric. Growth stocks have held up better this year, but their future earnings may not justify the higher valuations. Momentum and large-cap growth strategies performed well during the past one- and five-year periods.
Foreign Small-Cap Companies Bounce Back
In the international developed markets, value underperformed growth in the large-cap and small-cap space. Momentum recorded a gain of 5.81% while small-cap emerging market stocks posted a return of 2.74%. Foreign momentum strategies have performed well year to date and over the past twelve months.
Deflationary Conditions in May
In May, the three-month Treasury bill index returned 0.02% for the month. Interest rates on Treasury bills and money market funds are close to 0%. Savers may face continued low rates, which will either cause a deterioration in purchasing power or a shift to riskier assets. The CPI decreased by -0.80% year over year through April.
Treasuries Continue to Reward Investors
The returns of deflationary hedges were mostly positive for the month. Emerging market bonds and short-term government bonds returned 5.74% and 0.15%, respectively. Long-term government bonds are up 20.80% year to date. The Bloomberg Barclays U.S. Agg Bond Index returned 0.47% in May. Riskier forms of credit such as high-yield bonds, leveraged loans, and Business Development Companies recouped some of their losses from earlier in the year. The Fed has started to buy investment grade ETFs and high yield ETFs, which have helped returns.
Oil Prices Stage Comeback
Inflation-sensitive investment returns were mostly positive for the month. WTI crude oil posted a gain of 49.6%. Natural gas dropped by -14.79% in May. Gold bullion is up 14.12% YTD, outperforming many other assets. Gold miners have also outperformed as they provide levered exposure to the gold price. Inflation-indexed bonds have a positive return in 2020, but this is primarily due to the decrease in interest rates.
Swiss Franc and Japanese Yen Remain Strong
Over the past three months, the U.S. dollar appreciated against the Euro, Australian dollar, the Swiss Franc and Japanese Yen. The unprecedented amounts of U.S. fiscal stimulus may weigh on the U.S. dollar in the medium-term to long-term.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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