Global Growth Strategy May Commentary

Market Overview

Global equities delivered mixed results in May on generally strong corporate earnings results. The benchmark MSCI All Country World Index was up 1.60% in local currency. Europe Ex UK and North America outperformed the benchmark while Asia Ex Japan and the United Kingdom also managed gains. Emerging markets and Japan suffered losses in underperforming the benchmark.

Growth stocks outperformed value in May with the MSCI ACWI Growth Index gaining 5.11% in USD compared to a return of 2.96% for the MSCI ACWI Value Index. The main drivers of growth outperformance were U.S. mega cap stocks in information technology (IT) and communication services.

U.S. equities, which account for the largest allocation in the Strategy and the benchmark, powered higher in May, spurred by stabilising inflation indicators. The S&P 500 Index rose 4.96% for the month in USD while the tech-heavy NASDAQ, bolstered by strong performance from AI beneficiaries, rose 6.88% for its largest monthly gain since November. First-quarter earnings have been largely positive with 78% of S&P 500 companies reporting a positive earnings surprise. Fed officials voted to keep interest rate levels unchanged at its May meeting as Fed Chair Powell acknowledged that it may take longer than previously anticipated for inflation to cool enough to justify reducing interest rates. The Consumer Price Index eased from 3.5% year-over-year in March to 3.4% in April while the Fed’s preferred inflation gauge, core PCE, was unchanged. Ten-year Treasury yields remained elevated after a string of fresh data showed lingering inflation, ending the month at 4.50%, or 19 basis points lower, due to continued market optimism over the prospect of rate cuts later in the year.

Portfolio Highlights

The Strategy outperformed the benchmark for the month with positive sector allocation offsetting negative stock selection effects. On a relative basis, an overweight to IT, a lack of exposure to energy and stock selection in the consumer discretionary and utilities sector drove performance. Primary individual contributors included U.S. mega cap holdings Nvidia, Apple and Microsoft as well as streaming provider Netflix. Nvidia shares surged on better than expected fiscal first quarter results, highlight by sharp acceleration in cloud capex and optimism over the upcoming data centre GPU product cycle. Given increasing confidence around its competitive positioning and clear acceleration in AI infrastructure buildout at its key customers, Nvidia is positioned for robust long-term growth in AI server penetration, sales and earnings. Apple delivered quarterly earnings that were better than feared on growing optimism over a strong iPhone upgrade cycle. Meanwhile, services growth accelerated and surprised to the upside with a cyclical recovery in digital advertising and app store/gaming while sales growth in China, a key market where competitive threats weighed on the stock earlier in the year, was positive. Netflix outperformed after disclosing monthly active users on its ad-supported tier had nearly doubled since January to over 40 million globally. It also unveiled a multi-year deal with the NFL to broadcast live games on Christmas.

On the negative side, stock selection in IT, industrials and consumer staples weighed on results. Most of the individual detractors for the month were software makers including where deal pushouts, weaker spending among small and medium-sized businesses and a crowding out of software budgets by AI spending led to disappointing quarterly results and weaker outlooks. Shares of CRM software maker Salesforce derated after the company missed first quarter forecasts for current contract revenue and provided soft guidance for the current quarter. Software stock reactions to any disappointment are turning into 2-to-3 standard deviation type moves, which painful at the moment, have historically set up for strong opportunities ahead. Tax software maker Intuit reported solid quarterly results, driven by strength in TurboTax Live, but numbers fell short of high expectations following strong 2023 tax filing data. Other software laggards included Canadian web enablement provider Shopify and French cloud-based AI software provider Nice.

Transactions during the month included four purchases and five sales. New additions included Spanish fashion and fragrance company Puig Brands, U.S.-based waste management and recycling services provider Republic Services, Singapore gaming, e-commerce and financial services provider Sea Limited as well as U.S. medical technology company Inspire Medical Systems. Exits included Germany’s Deutsche Telekom, French software maker Nice, U.S. software maker Salesforce, U.S. medical devices manufacturer Stryker and U.S. pharmaceutical maker AbbVie.

Outlook

Recent results validate the need for investors seeking global exposure to include growth equities in their portfolio. The U.S. continues to show economic and earnings resilience as a soft landing comes into view, with a resilient job market supporting consumer spending. The macro picture in Europe remains muddled, but an early June interest rate cut by the ECB should help support easing financial conditions going forward. Meanwhile, in Japan, the actions taken by the government and exchanges to improve corporate returns and encourage greater equity ownership are beginning to flow through to better earnings. Companies are also sitting on high cash levels that can be directed to shareholder-friendly activities such as buybacks and dividends.