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US headline inflation (CPI) is down to 4.7% year on year from 5% a month earlier, with commodities helping pull it down, but mostly from base effect. We previously mentioned that the base effect will be at its strongest in June. Meanwhile, the Purchasing Managers’ Index (PMI) shows some disparity between the Manufacturing PMI retracting in May after 4 months of recovery (still in contraction territory) and the Services PMI continuing to improve (and in expansion territory). For the moment, following the still tight labor market figures just published, indications point to another rate increase of 25 bps by the Fed. We would like to point out the outstanding performance of the Nasdaq index at 5.8% in May and up for the 5th straight week. The chip manufacturer Nvidia came out with very strong results, which helped boost semi-conductor companies and the broader tech sector. The tailwind is the enthusiasm around AI and the very strong computing capacity needed to run AI, which Nvidia is able to provide. We should however highlight that the first 5 positions of Nasdaq 100 index represent half of the index in terms of weight, with individual YTD performances of between 38% to 46% for the first 4 and 172% for the fifth (explaining around 2/3 of the YTD index evolution). These same 5 stocks (Apple, Microsoft, Alphabet, Amazon and Nvidia) represent one fourth of the S&P500 in terms of weight and explain 70% of that index YTD performance (54% of S&P500 components having a negative YTD performance so far). These mega caps have therefore a huge impact on indices evolution and don’t reflect contrasted evolution between sectors and companies).
While the US job market remains very healthy, more and more consumer surveys seem to indicate less willingness to spend in the coming months, likely linked with draining savings accumulated during the COVID years. At the end of the day, it is the American consumer that will dictate if there is a recession or not and a decrease in consumption is not a good sign. Meanwhile, in Europe, inflation remains higher, and, even if also on a downward trend, far from reaching the 2% target level considered by the European Central Bank. This shouldn’t prompt the ECB to reconsider further rate hikes, but it could slow down the pace. Indeed, EU headline inflation (CPI) came out at 6.1%, down from 7%. Purchasing Managers' Index (PMI) measures show a divergence between services (indicating an expansion) and manufacturing (indicating a contraction) even greater than in the US. The expected boost from the China reopening story did not materialize for the European manufacturing sector. China has been facing recuring waves of Covid since reopening. The current wave (XBB strain for those still keeping track) is projected to cause 65 million new cases per week. This has not helped Chinese equity markets which have clearly disappointed this year (amongst the worst performing YTD), while expectations from the reopening were very high. Our summary recommendations For reasons unrelated to the above paragraph on China, we have made the decision to exit Chinese equities. We are wary of the geopolitical risk surrounding China-Taiwan. While a full-scale invasion remains a remote probability, flare ups bring volatility with a payoff that is not commensurate in our opinion (risk of sanctions in such a dramatic event are high and direct exposure to Chinese equities could be really damaging). Moreover, the topic of reshoring is a non-negligible headwind to the region. Instead, we rotated the exposure to a more global and/or US approach through a well-managed global equity fund, and added an ETF invested in US medical devices. We believe the theme to be decorrelated to the broader economy, constantly innovating and growing over time.
Chart of the month This graph shows the disparity in the performance of US technology stocks (Nasdaq as a proxy in green) and Chinese technology stocks (MSCI China Tec as a proxy in red) since the beginning of the year. One needs to be careful however, because the top 5 stocks of the Nasdaq are responsible for the great performance (as explained above), while the rest of the index looks much less attractive. Any correction on these 5 stocks would trace the curve back down just as fast.
Source: Bloomberg
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