Global equity markets extended their recovery throughout May, with an easing of recessionary fears feeding into a strong month for risk assets. Against this backdrop, US equity markets posted their strongest monthly gains since November 2023, fuelling a positive rebound in the Long Hold Growth-focussed portfolios which contain higher exposure towards more growth-oriented US assets. Meanwhile, an advancement in US-European trade negotiations helped alleviate fears of a significant slowdown in economic growth across the Eurozone, contributing to a strong month for the actively managed European and UK exposures within the OBI VM portfolio suite, which retain a preference for quality assets given the recent market turbulence.
Fixed income markets delivered mixed returns over the month, with government bonds coming under pressure from a sell-off in US Treasuries as Moody’s Ratings Agency downgraded US debt over concerns surrounding a rising budget deficit which may be exacerbated by Donald Trump’s ‘Big, beautiful bill’ which is heading to the Senate. High yield and corporate debt however, offset the weakness within government bond markets as risk appetite improved amid a decline in recession expectations in the US. The strong returns within corporate bond markets lifted the Long Hold Income portfolios, which focus on generating attractive yields alongside capital appreciation.
US Debt Downgrade
A key factor driving sentiment within fixed income markets over the month was the decision from Moody’s to downgrade US debt from its previous AAA rating to AA1, as it warned of rising government debt levels and a widening budget deficit. The move comes as Donald Trump looks to push his fiscal reforms through government despite claims that the landmark tax bill would add $2.4 trillion to US debt levels over the next decade. After narrowly passing through the Republican-controlled House of Representatives, the bill is expected to face a sterner battle to pass through the Senate as Democrats, and even previous Trump allies such as Elon Musk have publicly called for voters to protect public finances.
The reaction was more severe within the US as expected, with Treasury yields rising sharply over the month, weighing on the wider government bond market. In a sign of fading US exceptionalism, the dollar declined over the month, even during periods in which risk appetite waned, highlighting the challenges facing the US economy and US assets. Whilst we remain constructive on the US equities as long-term investors as key drivers of strategic growth, the flows out of US markets in recent months reinforces our decision to maintain a tactical underweight across the OBI VM portfolio suite. Moving forward, we are watching this data closely as we look to take advantage of opportunities within previously unloved areas of the equity market.
Lingering Tariff Uncertainty
Developments in US trade policy have remained a key driver of sentiment since Donald Trump’s return to office at the start of the year. Since announcing his ‘Liberation Day’ tariffs on April 2nd, the US President has largely used the threat of more severe tariffs as a tool to fast-track negotiations as we have seen with the US-China and US-EU tariff announcements. After a turbulent start to negotiations, the threat of 50% levies on all European imports into the US was rapidly walked-back by Trump in May, feeding into a positive period for European and US equity markets.
In a boost to risk appetite over the month, last week the US Court of International Trade put Donald Trump’s tariff implementation at risk as it ruled that the President did not have the authority to utilise the emergency economic powers legislation to impose April’s sweeping tariffs. The decision focusses on the baseline 10% and the higher ‘reciprocal’ rates, and whilst the ruling clouds the outlook as the Trump Administration appeals the decision, it is likely to provide nations with the opportunity to negotiate a more favourable trade deal with the US. While this could potentially limit the implementation of blanket tariffs in the months to come, there remains the opportunity for Trump to implement sector specific tariffs which are not covered by the ruling, such as those seen this past week as the President announced a 50% tariff on steel imports, forcing the UK to enter into further negotiations surrounding their recent trade deal.
The rapid implementation and reversal of tariffs by the Trump Administration continues to fuel wider portfolio volatility, with the chart below highlighting how challenging it has been for companies to navigate the economic uncertainty, feeding into the wider investment backdrop, with recent polling of fund managers by the Bank of America highlighting the largest underweight in the US dollar in nearly two decades.
The Path for Monetary Policy
Ongoing macroeconomic uncertainty has forced investors to rapidly adjust their expectations for global economic growth over the coming year, with a lack of clarity complicating the path for interest rates as central banks contemplate the impact of tariffs on inflation. With inflation levels still above target in many developed economies, policymakers have maintained a patient, data-dependent approach as they await further evidence of how the tariff uncertainty has fed into the economic data.
The European Central Bank, in line with expectations, voted in favour of a further 0.25% decline in interest rates today, with the committee’s updated projections pointing to a slowing in economic growth as a result of trade uncertainty. The terminal rate for the ECB remains contentious, with fiscal reforms in Germany and focussed on greater defence spending presenting upside risks to inflationary pressures. Recent inflation data out of Europe continues to support further loosening from the ECB, with headline inflation falling below the 2% target in May as declining oil prices weighed on energy costs.
The path to lower interest rates remains less uncertain in the US as the Federal Reserve Beige Book, which reflects reports from business contacts, paints a picture of an economy coming under the strain amid rising uncertainty. Most Federal Reserve districts reported flat or weaker economic activity, softening labour market conditions, and rising price pressures in the past six week period. Tomorrow’s US labour market data is expected to give us more clarity regarding the overall strength of the jobs market which is a crucial factor in wider consumer sentiment and spending.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited
