With the major developed economies boasting high covid-19 vaccination rates, the month of May was characterised by continued economic reopening and further confidence in the outlook for the second half of the year. Together with strong forward looking indicators, equity markets traded the month of May in the green, with the relatively higher contribution of value stocks boosting the performance of European equities.

European equity markets outperformed US equities by 1.8% as the broad European market index gained around 2.5% while US equities remained relatively flat, up by 0.7%. Across the underlying sectors, the European equity market posted a positive performance across all sectors, including growth oriented technology companies which turned positive late in the month. The top gainers for the month included companies within the consumer discretionary, financials, consumer staples, real estate and energy sectors. Given the relatively higher weighting across value stocks, European equities benefitted from the continued rally across banking stocks, up close to 5% in one month, and the recovery of key 2020 laggards, such as auto manufacturers and other consumer durables and apparel.

The positive equity market performance was supported by the release of leading economic indicators which continued to signal growth within the region. Strength in the German manufacturing sector was reflected in the monthly factory order data which beat expectations, up by 3% compared to the expected 1.7% monthly increase. Further consumer optimism was captured in the euro area retail sales data, which jumped by 12% on a yearly basis and exceeded the level of total sales volume recorded in February 2020 prior to the covid-19 pandemic.

In additional, Purchasing Manager Index (PMI) data for the Euro Area remained in a strong expansionary level, with the manufacturing PMI at 62.8 and services PMI at 55.1, both above expectations, as economies continued to open up from covid-19 restrictions. The surge in demand is captured across the manufacturing sector, which continued to report an elevated rate of new order growth as inventories of finished goods stock fell at a rate last seen since post the 2008 financial crisis. Meanwhile, in the services sector, following the first expansionary reading in April, May readings captured growth in new orders and short-term capacity constraints. As a result of the strong surge in demand, supply shortages emerged, pushing average input prices and average prices charged higher.

Meanwhile, US equities seesawed their way through the month, fully recovering from the mid-month dip triggered by inflationary concerns, and closed 0.7% higher. In April, year-on-year inflation growth in the US stood at 4.2%, above market consensus of 3.6%. The strongest pick up in prices was recorded across the energy segment, used cars and trucks, followed by transportation services and rent prices within the shelter category. The core inflation number, which excludes the price change across food and energy prices, also surprised to the upside. This strong increase in inflation was attributed to base effects, higher commodity prices and supply chain disruptions.

The higher than expected inflation data was followed by positive PMI readings, driven by the services sector, which grew at the fastest rate on record, at 70.1. New order growth accelerated as consumer confidence and demand returned as the economy reopened non-essential businesses. The manufacturing PMI, at 61.5 also reflected growth across output and new orders as well as job creation. The US PMI reading also confirmed inflationary pressures due to shortage of supply, and higher logistics, raw material and fuel costs pushing input costs higher that were passed on through higher output prices to consumers.

Overall the underlying US sector performance was mixed. Alpha was captured across cyclically driven sectors including energy and materials gained in access of 5%, followed by financials and industrials, which were boosted by stocks in the banking, capital goods and transportation industries. On the downside, growth oriented technology stocks continued to remain under pressure as inflationary concerns mounted and the consumer discretionary sector was led lower by the negative monthly performance across automobiles and retail industry.


This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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