May Market Commentary

The Durable Dollar: Slow Income That Lasts

“Our favourite holding period is forever.” – Warren Buffett

May presented market challenges, evidenced by the Purchasing Managers Index (PMI) report. With a PMI of 48.50, the report indicated a contraction in the manufacturing sector, as PMI readings below 50 signify economic slowdown.

Regardless of this slowdown, the S&P 500 soared by 6.25% over the month, while emerging markets followed the rising trend with a return of 4.31%, reflecting resilience globally.

Ongoing U.S. tariffs are causing anxiety in global markets, resulting in slower hiring and worries about economic growth, as investors analyse how the Federal Reserve (FED) will incorporate this data into its interest rate decisions.

---

May 2025 Market Commentary:

Developed Markets Performance

Executive Summary:

In May, developed markets saw moderate increases coupled with ongoing volatility. The MSCI World Index showed a 5.99% return, and the S&P 500 gained 6.25%, both influenced by tariff concerns and a slowing economy. European indices had varied results, with Germany’s DAX index achieving a record high, exceeding its May 28th record, after rising by 1.00%.

Over the past three months, the FTSE 100 returned 8.20%, the MSCI World returned 2.28%, and emerging markets returned 6.42%, somewhat alleviating tariff anxieties. This current fluctuation in tariffs could disrupt the S&P 500’s near V-shaped recovery after its almost -19.00% drop from its February peak.

Market Summary: 

European equities began the year favourably, with the STOXX 600 index expected to increase by 4.00% over the following 12 months, based on data from May 30th. Several positive macroeconomic factors support this optimistic outlook. Anticipated increased fiscal spending, ongoing economic growth improvements, and potential interest rate reductions are expected to bolster European stock markets.

Despite consumer worries about tariff-related inflation, the recent Conference Board's Consumer Confidence index provided positive news, with a significant rebound of over 12 points to 98.00 in May, following five consecutive months of decline.

The Personal Consumption Expenditures (PCE) Price Index for April, released last Friday, indicated a decrease in consumer inflation. Due to lower gasoline prices, the headline PCE was at 2.10% year-over-year, slightly down from 2.30% in March and the lowest since September 2024. The Core PCE, which excludes volatile food and energy components and is the U.S. Federal Reserve's preferred inflation measure, showed a minor increase of 2.5% year-over-year in May, compared to 2.70% in March.

As we navigate 2025, persistent economic, geopolitical, and trade uncertainties are likely to cause periodic spikes in equity market volatility. Investors can mitigate these fluctuations by diversifying their portfolios with investments such as global infrastructure assets. Historically, these assets have provided a compelling combination of downside risk protection, inflation hedging, and income generation.

---

Emerging Markets Performance

Executive Summary:

The Emerging markets (EM) have demonstrated strong growth in May 2025 as reflected by the positive return of 4.31%. This showcases its alignment with global market trends. India's BSE Sensex contributed to this positive momentum, gaining 0.55% driven by an uptick in new business and overall activity, offering a degree of support to market sentiment, bolstered by high-level discussions between India and the U.S.

Market Summary: 

Building on the 6.42% gain over the past three months, the EM Index's 4.31% month-to-date return highlights its alignment with the global traction. EM investors remain optimistic as Indian and U.S. officials are holding high-level discussions in the first week of June 2025. They aim to finalise tariff cuts in sectors such as farming and automobiles as part of an interim deal, as confirmed by two government sources.

According to sources, a U.S. delegation of senior officials from the USTR commenced two days of closed-door talks in New Delhi on Thursday with Indian trade officials, led by chief negotiator Rajesh Agrawal. The deal is expected to be formally announced by month end.

Forward Outlook: Portfolio Considerations:

Recent market dynamics, particularly the volatility observed in May, serve as a stark reminder of the inherent unpredictability of financial markets. Periods of heightened uncertainty necessitate a robust portfolio framework designed to mitigate downside risk and preserve capital. A well-diversified portfolio, encompassing various asset classes and geographies, is crucial for mitigating idiosyncratic risks and smoothing returns during turbulent periods. Emphasising defensive assets can provide a critical cushion against market swings.

A compelling illustration of defensive characteristics is found in the performance of the S&P 500 Dividend Aristocrats Index. During the recent period of market turbulence, this index demonstrated significant resilience, being up by 0.26% year-to-date (YTD) compared to the S&P 500's -4.90% decline. This outperformance is not an isolated event; the S&P 500 Dividend Aristocrats have a demonstrated history of weathering market turbulence and have exhibited lower volatility than the S&P 500 since their inception in 2005. Historical performance data further supports this, with the S&P 500 Dividend Aristocrats consistently delivering higher yields with a return of 2.50% over the 28-year (1998-2024) period compared to the S&P 500 with a Return Index's 1.80%, alongside a superior Sharpe Ratio, a measure of risk-adjusted performance. 

This consistent outperformance during market downturns and a generally lower volatility profile suggest a phenomenon where capital naturally flows towards companies perceived as more stable and reliable during periods of market stress. These are often companies with consistent dividend growth, indicating not just an income stream but also a degree of capital preservation and attractive risk-adjusted returns, making them a core defensive allocation. The underlying reason for the resilience of Dividend Aristocrats extends beyond mere low volatility. These companies are characterised by robust earnings, stable fundamentals, and strong histories of profit and growth. Such attributes are hallmarks of high-quality companies, which are well-suited for turbulent times.

Disclaimer:

The commentary you find on this page is for information only; it is not intended as research or a recommendation suitable to your circumstance. Please seek financial advice from a professional before acting on investment decisions.

As is the very nature of investing, there are inherent risks, and the value of your investments will both rise and fall over time. Please do not assume that past performance will repeat itself, and you must be comfortable in the knowledge that you may receive less than you originally invested.