The MSCI UK All Cap NR index returned -8.3% during the three months to the end of May, underperforming the MSCI World ex UK (£) NR index materially, which returned +4.9% in Sterling terms. Equity markets fell sharply during the period as countries responded to the COVID-19 outbreak by locking down their economies. Confidence was further impacted by a sharp fall in the oil price. Announcements of massive monetary and fiscal policy stimuli and a relaxation in lockdown rules in developed economies, alongside news of substantial cuts in oil production by the OPEC+ group, drove a significant recovery in asset prices by period end.
The outperformance of international markets was enhanced by Sterling weakness which increased international returns for UK based investors (MSCI World ex UK NR index returned +1.3% in local currencies).
In Sterling terms, the strongest regional equity market was the United States (MSCI USA NR (£) Index +7.1%), which performed strongly due to the index’s significant exposure to technology and pharmaceutical stocks.
Gilts produced a positive return (iShares Core UK Gilts ETF +4.5%) as investors became concerned that COVID-19 would negatively impact global economic growth significantly, and that central banks would manipulate government bond yields lower using quantitative easing, which then they duly announced. Investment grade debt performed poorly initially as credit spreads widened in response to sharply slower economic growth, however the Federal Reserve announced plans to buy credit, and this improved sentiment markedly (iShares Core £ Corporate Bond ETF -0.2%). ‘Riskier’ high yield debt produced a negative return (iShares Global High Yield GBP Hedged ETF -4.5%).
The Brent crude oil price ended May at $35.3/barrel, a decrease of 30.1% since the beginning of March. The hard stop to global economic activity has seen a collapse in demand for oil products, however announced supply side production cuts helped the oil price rise from mid-period lows.
The gold price rose 9.1% to $1730/oz in the three months to the end of May. Sterling weakness boosted returns such that the value of gold held by UK based investors rose by 13.1% (to £1,405/oz).