Global stocks managed a slight gain as investors reacted to mixed reports about the pace of worldwide economic growth. Technology and health care stocks rallied, while the energy sector continued to feel the impact of volatile oil prices on corporate earnings. Japanese stocks advanced on improving economic data. Emerging markets declined amid fears of higher U.S. interest rates. Bonds declined and the dollar rose against the euro and the yen.
Index Returns (Monthly)
U.S. stocks held steady in May, with both the Standard & Poor’s 500 Composite Index and the Dow Jones Industrial Average gaining 1%. The Nasdaq composite advanced nearly 3% on the back of strong returns from several technology stocks.
Health care had the best sector return, rising 5%. Shares of Humana soared on the last day of the month, leading to a trading suspension, as the health insurer’s interest in putting itself up for sale was leaked. For the month, Humana shares gained 30%. Rumored bidders Aetna and Cigna also rose in sympathy. Shares of Gilead Sciences climbed 12% as the biopharmaceutical giant easily beat quarterly earnings and revenue estimates and raised its guidance for 2015.
Energy stocks retreated after April’s strong advance, losing 5%. Large integrated oil companies including Exxon Mobil and ConocoPhilips saw their share prices fall as they reported lower profits and earnings due to the earlier plunge in the price of crude oil. However, oil futures appeared to stabilize during the month, gaining a little over 1% and ending the period above $60 a barrel.
Two megadeals dominated the mergers-and-acquisitions landscape. In the consumer discretionary sector, Charter Communications offered to buy Time Warner Cable for $78.7 billion in cash and assumed debt in the wake of Comcast’s decision to call off its tie-up with TWC, and separately acquired privately held Bright House Networks for $10.4 billion. If completed, the acquisitions will make Charter the largest cable system operator after Comcast. Charter shares lost 4% as the company reported a surprise first-quarter loss before announcing the deals, while Time Warner Cable gained 16%, helped by better-than-expected subscriber growth. In the information technology sector, Avago Technologies moved to take over larger rival Broadcom for $37 billion in cash and stock. Both companies make chips for communications devices, including Apple’s iPhones. Broadcom and Avago shares advanced 29% and 27%, respectively. Elsewhere, however, M&A activity appeared to be slowing, with announced deals in April dropping 6% in volume and 31% in value from March, according to market data provider FactSet. Private equity activity also declined.
First-quarter gross domestic product was revised downward from 0.2% to –0.7%, echoing the surprise contraction in the first quarter of 2014. Harsh winter weather, labor actions at West Coast ports and the strong U.S. dollar continued to be blamed for the slowdown. Other economic data was largely positive, however. The Commerce Dept. reported that employers added 223,000 new jobs in April, resuming steady expansion after March’s surprisingly weak gain (which was revised even lower to 85,000). The unemployment rate remained at 5.4%. Sales of new single family homes surged in April, as did the median selling price. While the large revision to first-quarter GDP caused some observers to extend their expectations for the timing of a rate hike, Federal Reserve Chair Janet Yellen and Vice Chair Stanley Fischer both reiterated that the central bank is likely to raise rates later this year.
In bond markets, the Barclays U.S. Aggregate Index shed 0.2%. After a bout of Treasury market volatility, the yield on the benchmark 10-year Treasury note ended 9 basis points higher at 2.12%. Treasury Inflation-Protected Securities and municipal issues lost 0.8% and 0.3%, respectively. Corporate bonds shed 0.7% as spreads to Treasuries widened 5 basis points to 133 basis points. In the new issue market, chip maker Qualcomm sold $10 billion of bonds to help finance share buybacks. The deal included $2 billion of 10-year notes with a yield just below 3.5%. High-yield corporates notched a 0.3% gain; oil industry-related issuers recorded some of the highest returns.
European stocks rose modestly amid growing signs of an economic recovery in the 19-member eurozone. Monetary stimulus measures continued to fuel investor optimism, especially after European Central Bank officials said they may inject even more stimulus in the months ahead. The gains came despite an ongoing debt crisis in Greece that jolted markets at times and remained unresolved at month-end. Overall, the MSCI Europe Index advanced 1%.
Investors cheered comments from ECB leaders suggesting that the bank’s newly launched bond-buying program would be accelerated, largely to avoid an expected summer slowdown in debt issuance. ECB officials also said the amount of the purchases could be increased if inflation continues to lag. The ECB is currently buying about €60 billion of bonds per month in an attempt to encourage lending activity and jump-start the economy. A resulting decline in the value of the euro has boosted European exports and it is also expected to produce a boom in tourism this summer.
Sector returns were broadly positive, led by a 5% gain in technology stocks and a 3% rise in utilities. Shares of Nokia rebounded after plunging in April amid concerns about a sharp decline in profitability at its networking division. Investors also warmed up to Nokia’s planned acquisition of rival Alcatel-Lucent, which is expected to take Nokia into higher-growth markets. In the utilities sector, shares of National Grid rallied amid a 5% gain in operating profits and a 2% increase in its full-year dividend payout.
Consumer discretionary stocks rose 1% as the declining euro benefited retailers and export-oriented companies. Shares of LVMH, which owns Louis Vuitton and other luxury brands, advanced amid expectations of sharply higher sales during the summer tourism season. The company said last month that it expects a weaker euro to significantly boost its full-year earnings, following a 16% increase in first-quarter sales. For the month, the euro fell 2% against the dollar.
Health care stocks also managed a 1% gain, supported by currency tailwinds as well as positive news in key clinical trials. Roche shares climbed higher after the Swiss pharmaceutical giant reported better-than-expected trial results for its new immunotherapy treatments in combination with traditional chemotherapy. Bayer shares advanced after the German drug maker raised its 2015 profit and sales forecasts largely due to currency trends. Bayer said it expects currency effects to boost sales by roughly 9% this year, up from an earlier forecast of 3%.
Among financial stocks, British banking giants Lloyds and Barclays enjoyed significant share-price gains after the U.K.’s Conservative Party earned a decisive and unexpected election victory. With the opposition Labour Party losing 26 seats, the election outcome made it far less likely that proposed new banking taxes and regulations would be adopted under a Conservative majority. Meanwhile, energy stocks lost 4% amid volatile oil prices. Shares of BP, Royal Dutch Shell and Total declined.
In bond markets, continuing turmoil in Greece and uncertainty regarding the direction of U.S. interest rates sent European bond yields higher. Worries that Greece might default on its debt and leave the eurozone caused the yield on short-term Greek government bonds to soar above 23% at month-end. International negotiators had not reached an agreement to resolve Greece’s financial crisis by June 1, though officials said a debt extension deal was in the works. Elsewhere, the yield on Germany’s benchmark 10-year note rose 12 basis points to 0.49%.
Japanese equities reached multiyear highs, supported by a weakening yen and encouraging data that showed the economy expanded faster than expected last quarter. The yen declined 4% to its lowest value against the dollar in over 12 years. The MSCI Japan Index was up 5%, while the broader MSCI Pacific Index rose 3%. The Nikkei 225 closed the month with gains in 11 consecutive sessions, the longest such streak since 1988.
Japan’s megabanks led financial stocks, helped by increased lending overseas, positive earnings forecasts, and improved efforts to return capital to shareholders. Mizuho Financial soared 20% after raising its dividend and announcing better-than-expected profits. Mitsubishi UFJ and Sumitomo Mitsui also rose. Industrial stocks experienced strong gains. Mitsubishi Heavy Industries climbed 18% after revealing an ambitious business plan to increase annual revenue by more than a trillion yen within three years.
The weak yen continued to lift Japanese exporters, particularly automobile manufacturers. Subaru-maker Fuji Heavy rallied 17% after announcing it would increase production capacity in North America four years ahead of schedule. Despite supply concerns, the company was on pace for a seventh straight year of record sales in the United States. Honda shares climbed 5%, largely unaffected by two separate vehicle recalls during the month. Toyota’s profits for the fiscal year ended March 31 were the largest ever by a Japanese company; its shares rose but trailed the overall market. Takata, whose faulty airbags have been responsible for millions of auto recalls, faced heavy losses in the past 12 months but expects to return to profitability in the current fiscal year.
Tokyo Electric Power had the highest return in the index, surging 45% on news it was teaming with Thailand’s state-owned power utility on liquefied natural gas operations. Shares of Murata Manufacturing, a producer of smartphone and onboard computer parts, jumped following reports that it would build new plants to help meet increased demand for their products. Japan Tobacco’s shares advanced after the company said it had reached an agreement to sell its beverage business to Suntory for $1.2 billion.
Sharp was the worst-performing stock in the index, plummeting 33%. Investors were discouraged by a restructuring plan that would drastically reduce the electronics manufacturer’s capital level. Toshiba shares lost 10% following a series of accounting issues that forced the company to withdraw profit forecasts and delay its earnings report.
Economic indicators were generally positive. Japan’s GDP grew by an annualized 2.4% in the first quarter, its strongest showing in a year, while April’s unemployment rate fell to 3.3%, an 18-year low. Following three straight months of declines, April retail sales increased significantly from a year earlier, regaining some ground after last year’s tax-induced soft period. However, excluding the effects of the tax increase, Japan’s core inflation rate dropped to zero in April.
Australian stocks were essentially flat. The Reserve Bank of Australia cut its interest rate for the second time this year, to an all-time low of 2%. The central bank cited a need to boost an economy hurting from decreased mining investment and also expressed concern over the weakening currency, which fell 3% against the U.S. dollar in May. Slowing earnings growth weighed on the largest banking stocks. However, real estate investment trusts and construction companies provided some relief. Building materials supplier James Hardie Industries gained 21% after announcing a special dividend and profits that nearly tripled from a year earlier.
Conversely, in Hong Kong, banking stocks outperformed and REITs were among the laggards. Shares of BOC Hong Kong, Hang Seng Bank and Bank East Asia all advanced, while commercial real estate firms were negatively affected by waning tourism and retail sales. Li & Fung plummeted 12% after Wal-Mart announced it would reduce some sourcing business from the company. Overall, the MSCI Hong Kong Index declined 1%, echoing losses in China after several major brokerages tightened requirements on margin financing.
Emerging markets lost ground as investors braced for a hike in U.S. interest rates and Chinese policymakers grappled with a series of challenges. The MSCI Emerging Markets Investable Market Index (IMI) shed 3%. Emerging markets debt also retreated, with currency losses weighing on local bond returns as the U.S. dollar strengthened.
China’s government continued to pursue looser economic policies in an effort to stabilize growth. The People’s Bank of China cut interest rates further, lowering the key benchmark rate for the third time in six months. Interbank borrowing costs in China have remained high despite rate reductions and lowered reserve ratio requirements for banks. Authorities have reduced borrowing costs to help encourage purchases of local government debt in the last few months; the three-month Shanghai Interbank Offered (Shibor) rate has dropped 200 basis points since March 31 — the largest two-month decline since 2008.
The MSCI China IMI fell 2%, pulled lower by energy stocks. Technology and telecommunication services shares also sank, with Tencent shares losing 3% on the heels of sharp gains. Telecom giant China Mobile shares slid in the wake of weaker quarterly profits and decreased wireless revenues. Meanwhile, Chinese A-shares continued to rise since the opening of the Shanghai-Hong Kong Stock Connect late last year, shrugging off concerns about slowing economic growth. The MSCI China A IMI has risen about 150% in the last 12 months, prompting brokerages to tighten margin lending rules.
Indian stocks regained momentum, fueled by hopes for an interest rate cut in early June (following two reductions earlier this year). The MSCI India IMI rose 3%, with technology and health care stocks posting strong gains. Shares of Bharti Airtel advanced after the wireless provider reported solid earnings at the end of April despite currency losses in its African business. Indonesian stocks climbed 2% as investors seemed to take comfort from signs that the government would continue with reforms and more growth-oriented policy measures. Standard & Poor’s raised the country’s credit rating from stable to positive and indicated that it might lift its bond rating to investment-grade status in the next year. Indonesian local bonds nonetheless declined, with the rupiah losing 2% against the U.S. dollar. Elsewhere in Asia, South Korean stocks dropped 5% as exports sank in May —their worst annual decline in nearly six years. Shares of Samsung Electronics fell in the wake of disappointing quarterly earnings amid increased smartphone competition.
Brazilian stocks dropped 12%, hurt by the depreciation of the real and expectations that the country’s central bank would tighten interest rates further in the face of worrisome inflation data. Inflation in Brazil remained above target at an 11-year high in May. After showing some signs of resilience last month, shares of Petrobras slid again despite better-than-expected adjusted earnings after a massive corruption scandal came to light earlier this year. Brazilian U.S. dollar bond returns were largely flat, but the 6% depreciation of the real weighed on local debt.
Russian stocks fell 6% as the ruble weakened against the U.S. dollar. Shares of Sberbank declined; the country’s largest bank reported weak earnings, dragged lower by increased bad loans in a sluggish economy. Polish stocks and local bonds fell as the country’s president, Bronislaw Komorowski, suffered a surprise defeat in elections. The Polish zloty dropped 4%.
In bond issuance, Mongolia announced plans to sell as much as $1 billion in international bonds as it pursued the development of an underground copper mine with global conglomerate Rio Tinto. The partnership is expected to help boost the government’s finances and seems to suggest more openness to foreign investment in the country.