Global equities had another strong month in May (MSCI World +4.6%), dragging them back into double-digit gains for the year (+10.7% YTD). May’s rally was heavily concentrated in the providers of AI computing power. NVIDIA continues to be the largest beneficiary of AI computing spend, but with investors’ expectations for the company now so high that the latest quarterly earnings per share (EPS) growth of 140% YoY failed to deliver a positive share price reaction. Investors’ interest has now turned to other overlooked AI beneficiaries, including producers of CPUs (Advanced Micro Devices [AMD]: +46% MoM) and memory chips (Micron +88% MoM), with the pair delivering a quarter of the S&P 500’s performance in May. Outside of the AI beneficiaries, share prices struggled, with eight of the eleven S&P 500 sectors ending May lower.
Emerging markets (EMs) had their strongest month in over five years (MSCI EM +9.7% MoM), leaving them 26% higher YTD. However, much like developed markets (DMs), the returns were concentrated in a handful of AI beneficiaries. Three chipmakers: Taiwan Semiconductor Manufacturing Company (TSMC), SK Hynix, and Samsung were responsible for more than 80% of the MSCI EM return in May. Sectors and countries not benefitting from the chipmaker boost generally struggled in May, with many ending the month in negative territory.
The war with Iran stagnated during May. Despite many comments from the US administration suggesting that negotiations were close to delivering a ceasefire that would unlock the energy supplies trapped by the closure of the Strait of Hormuz, the month ended with the Strait still predominantly blocked. Oil prices did soften on hopes of a ceasefire, with Brent crude ending the month 20% cheaper, at US$92/bbl. Gold’s recent rally seems to have run out of steam, with the precious metal’s price falling for a third consecutive month (-1.7% MoM), its longest losing streak since the inflation shock of 2022.
The possibility of a prolonged period of higher oil prices, and by extension higher inflation, is weighing on rate markets as investors start pricing in the distinct possibility of many central banks needing to hike rates to fight energy price inflation. US 10-year government bond yields drifted higher for the third consecutive month, ending May just below 4.5% p.a. The higher yields helped support the US dollar, which ended the month stronger against most DM currencies and many of the major EM currencies, too.
