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May was once again a challenging month for the markets due to the ongoing war in Ukraine and increasing inflation. There were also signs of recovery. For example, China is opening up after a series of COVID lockdowns. This allowed the markets to breathe a little more. This resulted in the S&P 500 closing the month flat. The Federal Reserve has also indicated that, to reduce the chance of a recession, they will not implement aggressive changes regarding interest rates. As a result, long-term returns stabilised in May, which is good news for the markets. However, rising energy and food prices remain a challenge.
Best performing fund in May 2022: UBS (Lux) Money Market Sustainable Fund -0.08%
Developed country equities had a turbulent start to the month. This was partly due to concerns about possible interest rate hikes and the war in Ukraine. Despite these factors, there was a positive movement at the end of the month after China opened up following a number of COVID lockdowns. The Federal Reserve, which announced it would not implement drastic interest rate changes, also contributed to the more optimistic market sentiment.
The S&P 500 closed the month flat and energy stocks performed better than technology stocks. This was due to the 15% price increase in raw materials. The EU ban on crude oil from Russia and China also contributed to the rise in these energy prices. As a result of these factors, inflation in the eurozone broke a new record of no less than 8.1%. On the other hand, the number of house sales has decreased due to rising mortgage rates and the demand for luxury goods has also decreased, which should help control inflation in the near future.
Equities in emerging markets stabilised during the month, but ultimately the performance was affected by the currency depreciation of these markets compared to the EUR. The Chinese yuan and the Indian rupee both fell by approximately 2% compared to the EUR.
Returns on 10-year government bonds showed signs of stabilisation after a sharp rise recently. The President of the European Central Bank spoke about a possible increase in short-term interest rates in the near future to catch up with the increased rates of other economies. This led to a rise in European bond yields and closed the gap with US rates. This also led to the Euro increasing in value by ~1% against the US dollar.
The negative performance of the developed and emerging equities fund and the high-yield bond fund was largely due to these currency fluctuations.
The money market yield in Europe remains low (<-0.5%), but may increase slightly in the coming quarters.
- Any peaceful solution regarding the war in Ukraine will be crucial to reducing market volatility.
- Rising energy prices remain a major source of market risk. Possible measures to control these prices will be examined.
- Economic data (such as the job market and inflation) will be closely monitored. Also, the 10-year yields of less than 3% in the US will be crucial for market recovery.
- The Federal Reserve is expected to raise the short-term interest rate again by 0.5% in June. This is already priced into short-term bonds.
Do not let the turbulent market disrupt your long-term goals. A well-diversified portfolio is the key to long-term success. A broad portfolio such as Vive puts together will most likely show an upward trend in the long term, although there will be weaker periods in between. Consistent investing is also crucial in periods like this, so you can take advantage of the declining market.