Multi Asset Update – May
Markets extended their recovery in May, building on April’s lows as consumer sentiment improved and trade tensions eased. Progress in US trade negotiations with the European Union and a temporary delay to planned tariff hikes reduced fears of a global recession and fuelled broadbased gains by shares. US President Donald Trump’s bluff and bluster and tariff-related to-ing and fro-ing are increasingly being ignored by investors. Wait and see is now the order of the day.
Against this backdrop, developed market shares (represented by the MSCI World index) rose 5.9% in US dollar terms, with US stocks outperforming most of their global peers. Shares in companies in emerging markets also continued to perform well in dollar terms, aided by a weaker US dollar. In contrast, global bond markets were in negative territory, with the Bloomberg Global Aggregate Index falling marginally.
Commodities were the worst performing asset class with the broad Bloomberg Commodities Index down over the month. Gold fell 0.7%, as improving risk appetite reduced demand for defensive assets. In our multi-asset portfolios, we remain underweight* shares as the longer-term implications of US trade policy for economic growth and business and consumer confidence remain unclear.
UK
Over the course of May, the FTSE 100 rebounded from the lows of April, returning 3.8% for the month. Inflation figures showed an increase from 2.6% to 3.5%. This was expected, because of higher employer National Insurance contributions and rising household bills. It did not stop the Bank of England (BoE) cutting interest rates by 0.25% to 4.25%. However, with inflation on the rise, the BoE signalled it may take a firmer approach to interest rates. That said, markets are still expecting around 0.40% in rate cuts over the rest of 2025.
Europe
In the shorter term, European stock markets have been supported by progress in trade negotiations and a temporary deferral of scheduled tariff increases. Eurozone inflation fell more than expected in May to 1.9% year-on-year. This is just below the 2% target of the European Central Bank (ECB). However, minutes from the ECB’s April policy meeting highlighted short-term inflation risks from trade tensions, with central bankers warning that a prolonged tariff conflict could increase longer-term price pressures. Growth forecasts have also been revised lower, with the European Commission projecting economic expansion of 0.9% in 2025 compared to the 1.3% it forecast back in the Autumn. This downgrade reflects the impact of new tariffs and elevated uncertainty.
US
US stock markets have staged a strong rebound from the falls triggered by Trump’s tariffs announcement on ‘Liberation Day’ on 2nd April, supported by progress in trade negotiations and a temporary deferral of the scheduled tariff increases. As the first-quarter’s earnings season concludes, corporate America has shown notable resilience, with broad-based earnings strength exceeding expectations. However, a key theme emerging is the widespread absence of forward guidance from companies about their trading expectations. This perhaps signals heightened uncertainty about the evolving trade landscape and concerns about the potential impact of tariffs in the months ahead.
Japan
Japanese shares remained volatile during the month, because of tariff uncertainty. Despite this, the TOPIX index, which is comprised of the country’s largest companies by stock market value, ended the month 2.9% higher in sterling terms. The Bank of Japan held interest rates at 0.50%, citing growth concerns and other risks. However, it reaffirmed it is likely to increase rates, once economic growth gathers pace. Trade talks with the US continued, but with limited progress because tariffs on cars remain a sticking point. Inflation remains elevated, with the headline consumer prices index (CPI) rate at 3.6% and core inflation (excluding volatile fresh food prices) at 3.5%. These are the highest inflation rates in more than two years, highlighting persistent price pressures. Meanwhile, 10-year Japanese government bond yields** rose to 1.53%, nearing 2008 highs.
Asia and Emerging Markets
China’s economy offered mixed signals in May, with manufacturing shrinking for a second month even as first-quarter economic growth beat forecasts at 5.4% year-on-year. Stimulus measures and trade deal optimism lifted share prices, though momentum faded as expectations for further economic support from the government waned. A 90-day US-China tariff truce eased market fears, but Chinese shares lagged, despite gains by some other emerging market stock markets. Overall, Chinese growth remains fragile and highly dependent on ongoing policy intervention.
Bonds
For bond markets, attention has shifted back to the US Congress and the attempt to pass a budget bill. What has passed through the House of Representatives is now officially being known as ‘The Big Beautiful Bill’. Elon Musk has publicly disagreed – cementing his fall from the graces of the 47th President. We believe the bill is illogical and inconsistent, and uses bold assumptions about growth, inflation, yields and the policies of central bankers at the US Federal Reserve. It is likely to add significantly to the US government’s budget deficit. Bond investors are eyeing the bill nervously and US government bond yields drifted higher during the month, led by bonds that have the longest time until maturity. On top of the bill’s unwelcome influence on bond yields, the potential for yet more unorthodox and what we believe to be unsustainable policy has added additional headwinds for the US dollar. The US currency tried to stage a recovery in mid-May, but this did not last. Sentiment towards the dollar is now even worse and thus the potential for a long-term decline is real.
