May 2024 market commentary

May ended with increased investor optimism in the global economic outlook, supporting risk assets across the board. Global bonds also posted positive returns as markets continued to price-in interest rate cuts despite a growing divergence in regional expectations and reticence among central banks to outline timeframes. Better-than-expected Q1 earnings data in the US saw the S&P 500 gain 4.96% over the month, while more encouraging growth data across continental Europe saw the Euro STOXX 50 rise 2.42% and the FTSE 100 gain 2.08%.

May market summary

US economic data remained positive, driven principally by services and manufacturing while housing sales and capital spending took more of a sideways step. Slowing disinflation, however, knocked market confidence in imminent interest rate cuts with stubborn headline and core inflation staying well above the Federal Reserve’s 2% benchmark. The minutes from the Fed’s Open Market Committee meeting in May poured more cold water on market speculation, indicating growing apprehension among policymakers and observing that some participants declared a willingness to tighten monetary policy further should inflationary pressures persist. Senior Fed officials including chair Jerome Powell and governor Christopher Waller stated in later interviews, however, that while they weren’t yet ready to back rate cuts, they believed further rate hikes were unnecessary.    

The UK exited its “technical recession” with GDP growth recorded at 0.6% for the first quarter, the country’s fastest growth rate in two years. Service sectors such as retail, public transport, haulage, and health were among the biggest drivers, though a surprise spike in growth was recorded in property repair and maintenance – poor weather and lower energy consumption for heating in tenanted properties contributed to a significant rise in damp repairs for housing associations.

UK inflation fell to 2.3%, largely driven by a 27.1% drop in energy prices in the year to April. However, services inflation ended the same period higher than expected – 5.9% against the Bank of England’s 5.5% forecast – which further polarised opinion on the Bank’s likely decision on monetary policy in June.
Eurozone inflation rose for the first time in 2024 to 2.6%, arresting what had been a steady month-on-month drop towards the European Central Bank’s (ECB) 2% target. In response, Germany’s 10-year bond yield, often used as a benchmark for regional borrowing costs, increased to 2.7%. Despite inflation remaining above target, the ECB is still expected to be the first major central bank to ease monetary policy, though back-to-back rate cuts in the summer appear less likely. Services continue to drive the eurozone’s economic revival, though there were also signs of a recovery in regional manufacturing.

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/05/2024 — 31/05/2024)

Global fuel duty shortfall prompts policymakers’ rethink on electric vehicle (EV) taxes

Governments around the world are introducing taxes and service charges on EVs and hybrid vehicles to compensate for declining petrol and diesel duties. Data from the International Energy Agency (IEA) showed that the increased uptake of EVs led to a global revenue loss of $10 billion in 2023, net of gains made from new electricity taxes. Should countries meet their electrification and phaseout targets, global fuel tax revenue losses could exceed $110 billion by 2035.

Revenues were already falling as internal combustion engines became more fuel efficient, but the growing popularity of EVs and hybrid vehicles threatens to further reduce an important source of infrastructural capital. Government responses to predicted shortfalls range from vehicle registration fees to mileage charges and taxes on public charging points. Most US states now have annual registration fees for EVs and hybrid vehicles – in April, New Jersey introduced legislation requiring new buyers to pay four years’ worth of its annual EV charge up front, equating to an additional $1,000 on purchasing costs. New Zealand recently introduced mileage-based charges for EVs and plug-in hybrids, and tax authorities in Israel are proposing similar levies to tackle congestion and a growing budget deficit.

Forecasts by the Office for Budget Responsibility (OBR) indicate that the UK could lose £15 billion in motoring tax revenues between 2024 and 2029 if fuel duty shortfalls aren’t addressed.

EV owners and green campaigners argue that the new measures reduce buying incentives and risk slowing the transition to lower-emissions vehicles. The UK government has also looked beyond potentially unpopular road use charges to focus instead on phasing out or reducing tax breaks for EV owners. Forecasts by the Office for Budget Responsibility (OBR) indicate that the UK could lose £15 billion in motoring tax revenues between 2024 and 2029 if fuel duty shortfalls aren’t addressed.

World Bank identifies global agrifood systems as a “huge opportunity” to cut greenhouse gas emissions

Global agrifood systems generate almost a third of the world’s greenhouse gas emissions, more than those generated by heat and electricity combined. A recent World Bank report – Recipe for a Livable Planet – indicates that affordable and readily available actions that every country can take could significantly reduce emissions, increase food security and climate resilience, and improve the health of vulnerable people and essential ecosystems. 

The report recognises that agrifood systems have a unique capacity to combat climate change by naturally drawing and absorbing atmospheric carbon. The payoffs for increasing global investment in cutting agrifood emissions are estimated to be significantly greater than the costs: while annual investments need to increase to $260 billion to meet net zero ambitions by 2050, associated health, environmental and economic benefits could be worth $4.3 trillion by 2030.

High-income countries dominate energy demand. The report recommends they focus on transitioning to renewable energy sources and promote more sustainable diets. Middle-income countries are encouraged to reduce emissions from livestock and rice, invest in soil health, and limit food waste. Preserving and restoring forests in low-income countries can be a cost-effective way to reduce emissions and support sustainable development – over half of the agrifood emissions in low-income countries derive from forest clearances for crops.

Tariffs and anti-subsidy measures in the US and EU look to stem the flow of Chinese exports

With the presidential election looming, the Biden administration announced a raft of tariff increases on $18 billion of subsidised Chinese goods. The increases reportedly follow a four-year review of trade relations and are designed to promote the growth of the American green technology sector and protect large-scale government investments in domestic microchip production and the climate- and clean energy-focused Inflation Reduction Act. 

Indications of economic recovery in China appear to support these concerns as weak domestic demand for goods suggests the country’s growth is being driven largely by its exports.

Tariffs will more than double on key technology and infrastructural imports including lithium batteries, solar cells, and semiconductors, but duties on Chinese-made EVs will rise from 25% to 100%. The US EV market is especially concerned by reports that Chinese EV production is significantly outpacing annual domestic sales – exporting the remainder could trigger an “extinction-level event” for US carmakers. Indications of economic recovery in China appear to support these concerns as weak domestic demand for goods suggests the country’s growth is being driven largely by its exports.

Anti-subsidy investigations by the European Commission are targeting Chinese green technology subsidies which “distort markets” and undercut European competitors. The EU’s Net Zero Industry Act looks to increase domestic production of green technology products but may yet find its ambitious transition goals dependent on affordable Chinese technologies.

While the Commission emphasised its openness to competition, it’s concerned that significant volumes of Chinese subsidies for EVs and other green technology products are state-funded and adversely affecting EU producers. Europe’s solar energy sector has also called on the Commission to act against anti-competitive pricing and the oversupply of solar components from Chinese producers.