Market recovery lays down roots

After a slow start, the markets rallied in the last couple of weeks of May, leaving major markets positive by the end of the month. And while that’s good news for investors in itself, looking at the numbers behind the returns gives us more reason to be encouraged.

In a typical recessionary market, the sectors hardest hit have been the ones that bounce back first. But this time it’s been a bit different. The initial market recovery was led by tech and health care – sectors that had proved relatively resilient during the worst of the market falls. This indicated that investors were still cautious about the wider economy.

However, May saw a return to tradition with the weakest sectors in February and March – such as banks, energy and oil, transport and home builders – outperforming. This suggests to us that investors are now more confident about the prospects for the broader economy and are looking for value in sectors hit hardest by the economic contraction.

Japan outperforms

Japanese equity has been relatively resilient over the year to date, and was the strongest performing major market in May, with the MSCI Japan returning 6.7%. By comparison, the S&P 500 returned 4.8% and the MSCI UK returned 3.1%.

In May, we added to our exposure to Japanese equities as we think that the Japanese economy, which has suffered greatly through the coronavirus crisis, has the potential to recover from this point as its prime export markets in Asia re-open their economies. Japanese companies typically have low levels of debt and will benefit from very strong government stimulus – worth about 10% of GDP (a measure of economic activity) – and supportive monetary policy from the Bank of Japan.

MARKET RALLY BOOSTS RETURNS FOR COUTTS CLIENTS

Positive market returns were good news for Coutts funds and portfolios, which saw another positive month. Good choices of stocks, particularly in the US, provided an additional boost.

On the bonds side, corporate bonds did well and government bonds were more or less flat. We made some adjustments to our bond exposure in April – reducing our overall exposure but also shifting from US Treasuries and emerging market bonds into investment grade corporate bonds – which has proved helpful as investor confidence in the corporate sector increased.

Caution is still required, of course. The summer months traditionally see fewer investors, which can take the edge off market performance at the best of times and could spark a correction in the current environment. And of course, past performance should never be taken as an indication of future performance. The value of investments, and the income from them, can always fall as well as rise, and you may not get back what you put in. Please see the tables below for further performance context.

In the medium-term, however, our current analysis provides some cause for a degree of optimism albeit cautiously so.

Longer-term returns continue to provide growth

One of the most valuable roles of investing in your long-term financial planning is to preserve your wealth against the long-term effects of inflation. Over five years, cumulative inflation to the end of May – measured by the Consumer Prices Index – is 8.3%. In effect, this means that over five years cash held in your pocket would have lost about 1/12^th of its spending power. And in the current low-interest rate environment, deposit rates won’t do much to off-set this.

But investing can potentially help sustain your wealth against the pace of inflation, and provide the opportunity for growth. Even considering the severe market falls of the first few months of the year, Coutts funds and portfolios have delivered returns well ahead of inflation.

Again though, it’s worth remembering that past performance is not a guide to future returns.

The Coutts difference – staying ahead of competitors

As well as beating inflation, we’ve managed to stay ahead of our competitors. The high level of expertise of our investment team, combined with our efficient process, means we offer our clients top-quartile returns for competitive fees.

Investing could play a vital role in your financial planning. At Coutts we have a range of investment options to suit your long-terms goals. Investing could be as easy as logging on to your online banking and investing through our online portal. Alternatively, contact your private banker who will be able to help you understand your investment needs and the products available.

Performance data quoted in local currency terms with income reinvested. When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Return data for funds are calculated net of fees, in sterling and assumes reinvestment of dividends. Past performance should not be taken as a guide to future performance. Portfolio performance figures are composite returns from the actual portfolios of all clients shown on a total return basis and quoted net of all fees. For the composite performance calculation, individual portfolio monthly returns are asset-weighted based on their respective asset values at the beginning of the month. Benchmarks represent static mix of equities and bonds in proportions relevant to each strategy.  Source: Coutts & Co, 31 May 2020.