The global economy showed a mixed performance in May, with the service sector outperforming the manufacturing sector. The US services sector expanded at its fastest pace in 13 months, while the eurozone and UK services sectors also grew. However, the eurozone manufacturing sector contracted for the third consecutive month, reaching its lowest level in three years. The US and UK manufacturing sectors also contracted, albeit less severely. The robust labour markets in the eurozone, UK, and US supported the overall economic growth, with low unemployment rates and strong wage growth.
Meanwhile, core inflation remained persistently high in the US and acutely so in the UK. Concerns grew among investors that central banks might tighten their policies further due to the prospect of sustained strong wage growth, potentially leading to higher-than-expected peak policy rates.
Equity markets were mixed over the course of the month, with the US, emerging markets and Japan generating positive returns, whilst UK and European markets were slightly negative. The key narrative that emerged over the month was the AI theme, which led to large gains in stocks within the technology industry. Within equities, our holding in the iShares MSCI USA SRI ETF generated strong absolute returns.
Within fixed income, yields rose, because of stickier inflation numbers and hawkish rhetoric from central banks. We remain underweight the riskiest parts of the fixed income market, which do not reflect recessionary risks.