Knowledge Center Archive


May 2012 Monthly Market & Performance Update

By SEI Investment Management Unit

  • Investor confidence deteriorated due to concerns about a possible Greek exit from the eurozone. 
  • Global equities and bonds struggled as risk appetite waned. 
  • “Safe-haven” government bonds were the most resilient, while all equity sectors lagged.

Investor confidence deteriorated in May due to concerns about the eurozone and the fate of Greece in particular. Spooked market participants reacted to the possibility of a Greek exit from the eurozone by spurning risky assets in favor of perceived “safe havens.” Consequently, global bonds once again outperformed global equities for the month, and government debt was favored over most other asset classes.

Economic Backdrop

The Greek election on May 6 resulted in a political stalemate, as no party gained enough votes to secure a majority and the leading parties failed to negotiate a coalition government. The next round of elections was scheduled for June 17. With the rise of popularity for anti-austerity parties, European leaders were forced to acknowledge the possibility that Greece could potentially leave the eurozone. This led many to fret over the possible contagion risks for the rest of the region and the wider global economy.

Greece’s financial sector problems compounded the delicate political situation, as the European Central Bank announced its intention to temporarily suspend lending to some Greek banks in mid-May. Within days, the credit rating agency Fitch announced the downgrade of Greek government debt, and subsequently of five Greek banks. This news followed swiftly on the footsteps of Moody’s decision to downgrade the debt of 16 Spanish banks on May 17. The country’s recession, rising unemployment and weak government finances (which could prevent Spain’s ability to support its struggling banks) were cited as reasons for the downgrades.

For the eurozone as a whole, economic data released during May painted a gloomy picture. The ZEW Indicator of Economic Sentiment for Germany (a survey which also covers analyst opinions for Europe, the U.K., Japan and the U.S.) fell from 23.4 to 10.8. ZEW suggested that sentiment deteriorated due to election results in France and Greece, which created questions about eurozone governments’ intentions to continue to battle the sovereign debt crisis. While eurozone retail sales increased marginally in March (after declining in February), unemployment levels for the region reached a record high of 10.90%, while manufacturing output continued to decline. The Markit Eurozone Manufacturing Purchasing Managers’ Index (PMI) fell from 47.70 in March to 45.90 in April (any number below 50.00 indicates contraction). Contraction in the manufacturing sector also spread from peripheral to core eurozone countries in April, as Germany’s PMI hit a 33-month low of 46.20. However, eurozone inflation fell marginally to 2.6% in April (and was estimated to have fallen to 2.4% by the end of the May).

News was mixed for the U.K. in May. Second estimates of first quarter gross domestic product (GDP) readings confirmed that growth in the U.K. contracted by 0.3%, more than the previous estimate (-0.2%) suggested. Further bad news showed that growth in the U.K. manufacturing sector slowed, which was reflected by the Markit/Chartered Institute of Purchasing & Supply U.K. Manufacturing PMI falling from 52.10 in March to 50.50 in April (although any number above 50.00 still signifies expansion). April retail sales fell 1.1% from a revised 3.10% in March. Bad weather and heavy rainfall impacted high street sales, but petrol and diesel sales (which fell by 13.2%) largely accounted for the drop. Fuel sales had been artificially boosted in the prior month due to panic buying. The Nationwide Consumer Confidence Index fell from 53 in March to 44 in April. The GfK Consumer Confidence Survey echoed this negative sentiment for April, as the index score remained at -31. However, GfK’s May survey suggested that consumer optimism increased in the month, as the index score rose to -29. Further positive news was provided by the announcement that the annual inflation rate, as measured by the U.K. Consumer Price Index, fell more than expected, from 3.5% in March to 3.0% in April. Also, the International Labour Organisation Unemployment Rate (three months) reported that the unemployment rate in the U.K. between January and March 2012 was confirmed at a revised 8.2%, lower than initial estimates.

U.S. economic data also presented an uncertain picture, highlighting that the country was not immune to eurozone troubles. Federal Open Market Committee April meeting minutes noted that events in the eurozone continued to pose risks to the U.S. and global economic recovery. They also stated that additional quantitative easing for the U.S. had not been ruled out. First quarter U.S. GDP estimates were revised lower to 1.9%, suggesting that the rate of growth witnessed in the fourth quarter of 2011 slowed by more than had previously been thought. The U.S. Consumer Confidence Index also fell more than estimated, from a revised 68.7 in April to 64.9 in May. On the labor front, the nonfarm payroll report provided further evidence of a slowing job market. Nonfarm payrolls increased by only 69,000 in May, and private payrolls increased by just 82,000, suggesting that corporations are curbing their hiring. The U.S. unemployment rate ticked higher to 8.2% from 8.1%. However, manufacturing output beat expectations, and advanced retail sales showed that consumer spending had slightly increased between March and April.

Market Impact

Although all areas of the fixed-income markets declined in May, government bonds proved to be the most resilient. The flight to safety witnessed in April continued during the month, and demand for government bonds benefited from this. Government bond yields generally fell in May, although peripheral eurozone countries (and Greece and Spain in particular) were notable exceptions. Greek government bond yields continued to rise due to worries over the state of the country’s economy and the potential ramifications of its election results. Spanish government bond yields rose toward levels that previously triggered the bailouts of Greece, Portugal and Ireland. Consequently, investors pulled huge sums from Greek and Spanish assets and bank accounts during May, further fueling demand for safe-haven U.K., U.S. and German government bonds.

Global equity markets struggled once again in May, with all sectors posting declines. More defensive sectors, such as Consumer Staples and Health Care, did best for the month. Cyclical sectors, notably Materials, Energy and Financials, struggled the most, reflecting investor risk aversion. The Financials sector was further weighed down by news of the Spanish and Greek downgrades, while the Energy sector was held back as oil prices continued to decline because of weak global economic data. In terms of country returns, Greek equities bore the brunt of negative sentiment during the month and experienced large declines, although most peripheral eurozone countries also had a difficult month.

Index Data1

  • The Dow Jones Industrial Average index declined 5.82%. 
  • The S&P 500 Index fell 6.01%. 
  • The NASDAQ Composite Index returned -7.04%. 
  • The MSCI AC World Index, used to gauge global equity performance, fell by 8.97%. 
  • The Barclays Global Aggregate Index, which represents global bond markets, declined by1.03%. 
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” moved from 17.15 to 24.06 during the month, but reached 25.10 on May 18 (the highest level so far in 2012). 
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $104.87 per barrel at the end of April to $86.53 by May 31. 
  • The U.S. dollar strengthened against most major currencies during the month and the euro weakened. The U.S. dollar ended May at $1.54 against sterling, $1.24 versus the euro and at 78.42 yen.

Portfolio Review

Eurozone worries started to look more like panic and, coupled with poor U.S. and Chinese data, pushed global stock markets down sharply in May. The overall negative backdrop created strong headwinds for equities, and SEI’s portfolios felt the impact. In large-cap equity, stock selection within the Consumer Discretionary and Information Technology (IT) sectors was the primary driver of weak results. In small-cap equity, IT was the largest detractor due to an overweight to and weak stock selection within the sector. In international equity, an underweight to Financials and strong stock selection within Materials and Industrials contributed positively to performance and offset weak results in Energy.
SEI’s riskier fixed-income portfolios were particularly affected by the seemingly endless negative headlines coming from Europe and general risk aversion in the market. In core fixed income, a curve flattener position helped as longer maturity Treasury yields fell more than intermediate maturity Treasury yields. An underweight to the outperforming Automotive sector subtracted from relative performance in high-yield bonds. In emerging markets debt, an overweight to Argentina, security selection in Mexico and an underweight to Chile and Peru contributed to the majority of underperformance.

• Underweight to Energy in Large-Cap Equity – stock selection within this sector also helped performance
• Consumer Discretionary in Small-Cap Equity – holdings in this sector made it the largest contributor to performance
• European Stock Selection in International Equity – picks in Germany significantly aided performance
• Regional Allocations in Emerging Markets Debt – an overweight to Qatar helped performance

• Stock Selection in Large-Cap Equity – picks in Consumer Discretionary and IT detracted from results
• Overweight to Energy in Small-Cap Equity – the sector was the worst performer in the benchmark during the month
• Energy in International Equity – stock selection in this area produced generally weak results
• Underweight to Automotive in High Yield Debt – this sector outperformed for the month

Manager Positioning and Opportunities

SEI’s portfolio managers use solid investment-manager selection and portfolio construction in an attempt to deliver diversified sources of excess return for our portfolios. In large-cap equity, managers are maintaining overweights to IT and Consumer Discretionary while holding underweights to Industrials and Utilities. Fundamental managers continue to have a quality bias, believing that the U.S. economy is in for an extended period of low growth, but not an outright recession. In small-cap equity, the portfolio manager believes that the domestic economy is likely to remain on a slow growth trajectory, and thus maintains a slightly pro-cyclical posture in the portfolio. This is expressed through overweight positions to IT and, to an increasing extent, Industrials and Consumer Discretionary. International equity managers are maintaining a strategic overweight to emerging markets, as they still see these as the future source of global growth. In contrast, they are underweight to the aging economy of Japan, which may only have a few more years before it must confront its staggering fiscal deficit. Therefore, managers are employing shrewd stock selection to uncover pockets of strength in the country.

In investment-grade fixed income, managers continue to maintain overweights to the Financial sector, as spreads remain wide while fundamentals continue to improve with new financial regulations and capital requirements that should benefit bondholders. High-yield debt managers have maintained an allocation to bank loans due to their more defensive positioning and event-driven opportunities. Despite the steep price declines in high-yield countries, emerging markets debt managers are keeping their overweight positions on extremely attractive valuations coupled with the ability of those countries to service debt, especially in the near term.

Our View

We are neutral on equities versus bonds. Although we believe equities are likely to experience a period of pullback and consolidation in the months ahead, we do not expect a severe reversal like the one experienced last year.

We favor U.S. versus international equities. Although the eurozone has made some progress in dealing with its debt crisis, it will continue to face periods of stress. Growth in the strongest countries is likely to trail the U.S., while the problem debtors continue to face austerity-induced economic decline. Eurozone exporters may benefit if the euro declines as we expect. Emerging markets will likely continue to grow at a faster clip than the U.S., but China, India and Brazil all have issues that lessen their near-term attractiveness.

We favor high-yield debt versus investment-grade fixed income. The financial health of high-yield debt issuers suggests that this asset class should continue to outperform Treasurys and investment-grade bonds.

1Source: Bloomberg



This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. There is no assurance as of the date of this material that the securities mentioned remain in or out of SEI Funds.

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There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging Markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

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