May 2012 Monthly Market Commentary

Door 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 and 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 favour of perceived “safe havens”. Consequently, global bonds once again outperformed global equities for the month, and government debt was favoured over most other asset classes.

Economic Backdrop

The Greek election on 6th May 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 17th June; 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, which had downgraded the debt of 16 Spanish banks on 17th May. 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 in May. ZEW suggested that sentiment deteriorated due to election results in France and Greece, which created questions about eurozone governments’ intentions to continue to “fight 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% and 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 in 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 (3 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. Indeed, the 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, as “several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough”. 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 labour 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 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 as they are perceived to be safer investments compared with other fixed income instruments. Government bond yields (which move inversely to prices) 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 towards 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 fuelling demand for “safe haven” U.K., U.S. and German government bonds.

Global equity markets struggled once again in May and all sectors declined. More defensive sectors, such as Consumer Staples and Healthcare, did best for the month. Cyclical sectors, notably Materials, Energy and Financials, struggled the most in May, 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 had a difficult month.

Index Data

  • The MSCI AC World Index, used to gauge global equity performance, fell by ($) 8.97% in May. 
  • The Barclays Global Aggregate Index, which represents global bond markets, declined by ($) 1.03% over the month. 
  • 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 18 May (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 a barrel at the end of April to $86.53 by 31 May. 
  • 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.

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 favour U.S. versus international equities. The U.S. certainly looks like the best house in a bad neighbourhood. 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 favour 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 treasuries and investment grade bonds.

Glossary of Financial Terms

  • Austerity: Austerity refers to measures taken by a country’s government in an effort to reduce expenditures and a budget deficit. 
  • Credit ratings: Credit ratings are an assessment of the risk of default of a company or country. The higher the credit quality (or rating), the lower the perceived risk of default. AAA rated are the highest; D rated are the lowest. Ratings below BBB are classified as non-investment grade, or junk, and are considered to be riskier. 
  • Peripheral eurozone countries Peripheral eurozone countries are those countries in the eurozone with the smallest economies. 
  • Core eurozone countries: Core eurozone countries are those countries in the eurozone with the largest economies. 
  • Quantitative easing: Quantitative easing refers to expansionary efforts by central banks to help increase the supply of money in the economy. 
  • Nonfarm payrolls: Nonfarm payrolls represent the number of people employed in the U.S, excluding farm, general government, private household and non-profit organisation employees. 
  • Cyclical sectors or stocks: Cyclical sectors or stocks are those whose performance is closely tied to the economic environment and business cycle. Managers with a pro-cyclical market view tend to favour stocks that are more sensitive to movements in the broad market and therefore tend to have more volatile performance. 
  • High yield debt: High yield debt is rated below investment grade and is considered to be riskier.


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SEI sources data directly from the following vendors: Factset, MSCI Barra, Russell, TOPIX, FTSE, Barclays Capital and BofA Merrill Lynch. Where appropriate, returns in base currencies are converted to the relevant currency using WM Reuters 4pm Spot rates.