May market update

May was a choppy but overall solid month for markets, which continued to consolidate around pre-existing trends. The ongoing rollout of vaccination programs is successfully allowing economies to steadily re-open across the globe, albeit at different speeds in different regions. Coupled with ongoing soothing policy statements from central banks and still substantial government fiscal support, the near term investment climate remains broadly favourable.

“Inflationary pressures are perhaps the key current topic of note, given their potential to force Central Banks into tightening policy before they (and markets) are ready.”

As could be expected the underlying themes are unchanged, although another month of data is gradually helping investors piece together some insights on the most important issues of the day. Inflationary pressures are perhaps the key current topic of note, given their potential to force Central Banks into tightening policy before they (and markets) are ready. Inflation prints during April and May have been larger than expected, particularly in the USA, but a closer inspection does offer some comfort.

“With 7 million more people unemployed in the USA than before Covid, the pressure on inflation gauges from wage costs is not likely to be sustainable for any period of time, until that number comes down substantially.”

Many of the headline inflationary drivers are related to rising prices of goods, which in turn are related to specific Covid supply issues, factors which one could reasonably expect to even themselves out with the passage of time. Price trends in the much larger services sector of the developed economies also remain hard to read. With 7 million more people unemployed in the USA than before Covid, the pressure on inflation gauges from wage costs is not likely to be sustainable for any period of time, until that number comes down substantially. Due to interpretations such as this, it is fair to say that bond markets did indeed pick up some evidence that they can breathe easy for a while longer, even though inflation data was robust.

“We have been taking a little bit more money out of corporate bonds given the low returns on offer and redeploying it into a combination of convertible bonds, cash and alternatives such as commodities.”

As mentioned in previous updates, your investment team has continued to try to broaden the number and ‘flavour’ of exposures in portfolios, to reduce our dependency on any one particular factor for returns. Within equity holdings we are aiming to be much more balanced than we have been between the ‘growth’ and ‘value’ styles that are currently vying for market leadership. We have also been taking a little bit more money out of corporate bonds given the low returns on offer and redeploying it into a combination of convertible bonds, cash and alternatives such as commodities. The thinking being to keep some powder dry for future periods of volatility, balance out risk taking elsewhere and broaden the diversification even further than it already is.

“A difficult valuation backdrop does not make it impossible to build a sensible portfolio.”

The outlook still remains solid but not without risk. Good value is still hard to find, not just in safer assets where valuations have been extended for years but also amongst riskier assets, nearly all of which have rallied substantially over the last year. However, a difficult valuation backdrop does not make it impossible to build a sensible portfolio and we still think it sensible to remain broadly fully invested in this early stage of the recovery cycle.

Portfolio Performance

Portfolios delivered small positive returns in May, with little difference between risk mandates. As with the previous month around 60% of managers managed to beat their benchmarks, a decent result but still perhaps a tad lower than we would hope for. That said it is not a bad number for a period during which asset markets are consolidating, rather than trending. There was also reasonable geographical dispersion of returns, with, for example the UK and European equity markets pulling away from the rest of the world, mainly down to their higher exposures to more economically sensitive sectors. Gold was strong, helped by a weaker dollar.

On behalf of the Saltus Investment Committee, June 2021