May 2023 market commentary

A sluggish month in world markets saw falls in the FTSE All-Share (-4.63%) and Euro STOXX 50 (-1.86%), and a modest gain in the S&P 500 (+0.4%) influenced in part by a resolution to US debt ceiling negotiations. Stronger performance in the Nikkei 225 (+6.06%) was linked to increasing investor confidence in Japan’s recovery from deflationary stagnation. 

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/05/2023 – 31/05/2023) 

The Bank of England confirmed a 12th-consecutive base rate hike to 4.5%. The Bank retained its existing line on UK monetary policy, suggesting that the cycle of rate increases may continue if economic pressures persist. The Federal Reserve also announced a rate hike to a target range of 5-5.25% but notably relaxed its stance on future policy firming in its accompanying monthly statement suggesting that the cycle of rate hikes in the US may be about to end.

The UK’s headline inflation rate fell from 10.1% to 8.7% but remained above a forecast of 8.2%. Core inflation – all commodities, services and goods minus more volatile fuel and food costs – rose from 6.2% to 6.8%, its highest rate since March 1992. This and the slower-than-expected decrease in headline inflation saw markets re-price their peak rate expectations to around 5.5%.  

US headline and core inflation rates rose marginally (+0.4%) but remain well below their 2022 peaks. The increases were linked to a temporary spike in gas and used vehicle prices and haven’t significantly affected forecasts that US inflation rates will decrease in the coming months.

Commodity prices remained weak and equity returns were subdued owing to continuing uncertainty in global economic forecasting. Sovereign bonds underperformed in both the UK and US, and Eurozone bonds only recorded a modest increase (+0.5%) after rallying late in the month. Tech stocks were the standout performers in equity markets due to growing media and investor interest in the transformative potential of AI and increased demand for next-generation technology processors.

Ofgem announced a reduction in the UK’s annual household energy price cap for July to September from £3,280 to £2,074. Forecasters expect a further reduction in October with many anticipating a cap below £2,000. Wholesale energy prices are decreasing due to Europe-wide energy conservation efforts, increased consumption of renewables and the bonus of a relatively mild winter.

Favourable winds for UK energy

An independent report published by Imperial College London and Drax Electric Insights found that UK wind-generated electricity (32.4%) outpaced gas-generated electricity (31.7%) during Q1 2023 – the first time that wind has been the predominant source of the country’s power output. During Q1, UK turbines generated 24 TWh of electricity – enough, the report claims, to charge more than 300 million Tesla Model Y vehicles. Progress in the cleaner, greener transformation of the UK’s power system was also reflected in the total supply generation figures for the same period: 42% of the country’s electricity was generated from renewable sources (wind, solar, hydro and biomass) against 33% from fossil fuels.

An independent report ... found that UK wind-generated electricity outpaced gas-generated electricity during Q1 2023 – the first time that wind has been the predominant source of the country’s power output.

This is a significant milestone for renewables and a potential turning point for the UK’s dependency on fossil fuels. Having accounted for 40.7% of the UK’s electrical supply in 2013, coal provided just 1.3% of electricity in the first quarter of 2023 and only one coal-fired power station – Ratcliffe-on-Soar in Nottinghamshire – remains in operation.
A new entente in EU-UK regulatory relations?

On  19 May, the Treasury published a Memorandum of Understanding establishing a joint framework for “robust and ambitious bilateral regulatory cooperation” across financial services in the EU and UK. The new Joint EU-UK Financial Regulatory Forum’s principal objectives are to develop closer cooperation in preserving financial stability, maintain market integrity, and protect investor and consumer interests. With a clear eye on improving strategic alignment, the Forum is intended to facilitate and monitor the progress of structured regulatory cooperation across financial services and help resolve compatibility and cross-border implementation issues. 

Meanwhile, the government has decided to pull back on its post-Brexit resolution to revoke all EU-derived regulations on the UK statute book – now only around 600 out of 4,000-plus EU regulations will be scrapped by the end of the year with 500 more set to follow via the Financial Services and Markets Bill. The decision was welcomed by the British Chambers of Commerce who believe that a wholesale reformation of the rules could create economic uncertainty. The Greener UK coalition of environmental conservationists also reacted positively, noting that many existing environmental protections are based on EU-era regulations.

ESG regresses in Florida, progresses in France

On  2 May, Florida governor Ron DeSantis signed House Bill 3 into law barring state investment in ESG-related goals and prohibiting the issuance of ESG bonds. Republicans from energy-producing states argue that increased focus on climate change and workforce diversity has impacted returns – DeSantis himself has accused energy executives and investors of embarking on “ideological joyrides”. As a first step, DeSantis has committed to divesting state pension funds from ESG-linked investments – a move supported by 18 other Republican governors.

The  French government, meanwhile, is planning an annual €500 million tax credit to accelerate investment in green industrial and infrastructural developments. In particular, it aims to cover capital expenditures on 25-40% of companies’ investments in renewable energy sources and green technologies. Running until 2025 with the possibility of an extension to 2029, the planned credit is expected to generate €23 billion of private investments and create 40,000 jobs by 2030. A new budgetary law also aims to create a new class of tax-free savings accounts for under-18s which is expected to generate a further €5 billion to finance green development.

Science-based targets for nature: a ‘world first’

The first nature targets will focus on the impacts of corporate activity on land and freshwater with the dual aim of protecting and restoring terrestrial ecosystems and improving the quality and quantity of freshwater.

The Science Based Targets Network (SBTN) has launched the world’s first corporate science-based targets for nature, helping companies to assess and prioritise their biodiversity impacts and build nature into their business strategies. Over 200 international organisations participated in the initial structuring of SBTN’s methods, tools and guidance, including companies with over $4 trillion in combined market capitalisation. A pilot group of 17 companies – including GSK, H&M and Tesco – will trial the initiative with all companies expected to join the full roll-out in early 2024.

SBTN’s first nature targets will focus on the impacts of corporate activity on land and freshwater with the dual aim of protecting and restoring terrestrial ecosystems and improving the quality and quantity of freshwater.