World Markets Review for May 2016 | Capital Group

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Market Commentary

June 2016

World Markets Review for May 2016

Stocks rose modestly as signs of improving global economic growth were tempered by investor concerns about a potential increase in U.S. interest rates. Developed markets generally outpaced emerging markets amid encouraging economic data in the U.S., Europe and Japan. Technology stocks rallied, while the energy and materials sectors lost ground. Bonds were essentially flat and the U.S. dollar rose against the euro, the yen and most other currencies.

Index Returns (Monthly)

May 2016

YTD 2016

U.S. Dollar %

Local %

U.S. Dollar %

Local %

MSCI World

0.6

1.8

1.8

0.6

MSCI EAFE

–0.9

1.9

–1.1

–3.6

MSCI EM IMI

–3.7

–0.8

1.8

1.4

MSCI Europe

–0.6

1.8

–0.7

–1.8

MSCI Pacific ex Japan

–2.2

1.3

1.7

1.7

S&P 500

1.8

1.8

3.6

3.6

MSCI Japan

–1.0

2.6

–3.2

–10.7

MSCI UK

–0.5

0.2

0.6

1.8

Barclays Global Aggregate

–1.3

5.9

Barclays U.S. Aggregate

0.0

0.0

3.5

3.5

J.P. Morgan EMBI Global

–0.3

–0.3

6.9

6.9

J.P. Morgan GBI-EM Global Diversified

–5.4

–0.6

7.7

5.8

MSCI index returns reflect net dividends. Source: RIMES

North America

U.S. stocks moved higher on stronger U.S. economic data, higher oil prices and signs of firming economic conditions in Europe. The Standard & Poor’s 500 Composite Index rose 2%. The Nasdaq composite gained 4% and the Dow Jones Industrial Average was essentially flat.

Seven of 10 S&P sectors had positive returns. Information technology stocks rallied 6% as investors grew more optimistic about U.S. economic growth. Shares of Microsoft, Alphabet, Apple and Qualcomm all rose after strong economic data eased concerns over demand for consumer electronics. Apple shares, which increased 7%, also benefited from news that Berkshire Hathaway had added a $1 billion position in the tech giant to its portfolio.

Financials and health care stocks advanced 2%. Intercontinental Exchange shares jumped 13% after the financial markets syndicate reported stronger-than-expected first-quarter earnings and declined to make a purchase offer for the London Stock Exchange. Chubb rose 7% as the company was one of the only major insurers to report an increase in profit in the first quarter. In health care, new cancer and arthritis treatments helped Pfizer beat earnings expectations, lifting its shares 7%. Meanwhile, shares of Allergan climbed 9% following the pharmaceutical giant’s announcement of a $10 billion share buyback program and positive clinical trial results.

Accelerating construction and mergers-and-acquisitions activity pushed shares of some materials companies higher. Martin Marietta Materials, a supplier to the heavy construction industry, rose 12% after announcing better-than-expected earnings. The company highlighted that the quickening pace of construction activity helped drive first-quarter results. A $62 billion takeover offer from German chemical and pharmaceutical giant Bayer led shares of Saint Louis–based Monsanto to climb 20%. Although the offer was rejected, Monsanto stated that it is open to discussions with Bayer due to the substantial benefits of a merger.

Industrial stocks were flat despite strong economic data. General Electric, the largest company in the industrials sector, slid 2%. The ongoing restructuring of its business made investors more pessimistic regarding GE’s revenue and profit growth prospects this year. Shares of Boeing declined more than 6% after the aircraft manufacturer noted that it was considering cutting prices in order to gain market share. In contrast, automotive parts and HVAC manufacturer Johnson Controls rose 7% ahead of its proposed merger with Ireland-based security systems maker Tyco.

Commodities prices were mixed. West Texas Intermediate crude oil prices rose 7% to end the month near $49 per barrel as production declined and U.S. supplies shrank. Despite higher oil prices, most energy companies had negative returns. In particular, ConocoPhillips shares fell nearly 8% as the company’s Canadian oil sands operations around Fort McMurray, Alberta, were suspended for most of the month due to devastating wildfires. Falling metals prices hurt mining companies. Shares of gold miner Newmont Mining fell 7% as gold prices retreated for the first time in five months. A decline in China’s copper imports weighed on shares of Freeport-McMoRan, which plummeted more than 20%.

Mergers-and-acquisitions activity picked up pace in May after a subdued start to the year. In addition to Bayer’s rejected offer for Monsanto, other notable bids included Great Plains Energy’s $9 billion deal for Westar Energy, and pharmaceutical data and services provider IMS Health’s $9 billion purchase of competitor Quintiles Transnational. In a growing trend, more companies are facilitating M&A transactions without an advisor. As of May 10, 27% of deals valued at $1 billion or more were executed without an investment bank advisor in 2016, according to the Wall Street Journal — up slightly from 26% in 2015 and more than double from 13% in 2014.

U.S. economic data gathered momentum. First-quarter gross domestic product growth was revised up to 0.8% after the decline in private investment was not as dramatic as previously estimated. Retail sales, durable goods orders and industrial production all accelerated in April, while housing data showed a surge in construction and sales activity. Payroll employment increased by only 160,000 in April — the smallest increase since September 2015 — but wages continued to rise. Minutes from the Federal Reserve’s April rate-setting meeting suggested a higher likelihood of an interest rate increase during the coming months than previously anticipated.

In bond markets, the Barclays U.S. Aggregate Index was flat. The yield on the benchmark 10-year Treasury note rose by 1 basis point to 1.84%. Investment-grade corporate spreads to Treasuries widened 3 basis points to 149 basis points. As energy prices continued to recover, high-yield bonds advanced, rising 0.6%. Investment-grade corporates ticked down 0.1%. Despite higher energy prices, Treasury Inflation Protected Securities lost 0.7% as the possibility of a Federal Reserve rate hike this summer gained traction. Municipal bonds notched a 0.3% return. The minimal change in spreads and returns reflected well-matched moderate supply and demand of new bonds. One of the more notable was The Southern Company’s $8.5 billion issue in seven tranches, all at fixed rates, with maturities ranging from two to 30 years and coupons from 1.55% to 4.4%. The proceeds were used, in part, to fund the utility company’s purchase of AGL Resources. The additional debt triggered a one-notch downgrade in the company’s long-term unsecured rating by Fitch and Moody’s.

Europe

European stocks advanced amid signs of improving economic data and substantial progress in the ongoing Greek debt crisis. Eurozone consumer prices remained in negative territory on a year-over-year basis, but rose slightly from April levels, boosted by aggressive stimulus measures from the European Central Bank. Meanwhile, the unemployment rate in Germany fell to 6.1%, the lowest level since the 1990 reunification of east and west Germany. Overall, the MSCI Europe Index gained 2%.

International creditors approved a plan to release €10.3 billion of new loans to Greece, likely averting a repeat of last summer’s bitter dispute over the terms of Greece’s bailout program. The move came after Greek lawmakers adopted a series of austerity measures required by eurozone lenders and the International Monetary Fund in exchange for the bailout funding. “Brexit” fears also waned amid indications that U.K. voters are likely to reject a June 23 ballot initiative to abandon the European Union.

Most sectors enjoyed positive gains, led by information technology and telecommunication services. Shares of SAP rose after the German software giant announced new trans-Atlantic partnerships to improve the compatibility of its cloud computing platform with popular Apple and Microsoft products. In the telecom sector, Vodafone shares moved higher after the world’s second-largest mobile phone carrier generated full-year organic revenue growth for the first time since 2008.

Health care stocks rose, advancing 3% in aggregate. Shares of Swiss drugmakers Novartis and Roche rallied amid talk of a deal that would result in Novartis selling its nearly $14 billion stake in Roche, freeing up cash for potential new acquisitions. Novartis acquired the stake years ago in preparation for a merger bid that ultimately fell through. In contrast, shares of German drug company Bayer plummeted amid investor concerns about its $62 billion offer to buy U.S.-based Monsanto.

Consumer staples stocks also advanced about 3%, supported by higher demand for defensive dividend-paying stocks. Shares of food giant Nestlé rose after the company announced a cost-cutting initiative designed to generate savings of roughly 2.5 billion Swiss francs during the next three years. Shares of Anheuser-Busch InBev climbed higher as the world’s largest brewer made progress on gaining worldwide regulatory approvals for its planned $107 billion acquisition of rival SABMiller.

Financial stocks bounced back after a rough start to the year, gaining 2%. Shares of BNP Paribas rose after the French bank reported a first-quarter profit of €1.81 billion, a 10% increase from the same period a year ago. Zurich Insurance also moved significantly higher despite a 28% fall in its first-quarter profit. The energy and materials sectors each lost about 3% for the month.

In fixed-income markets, European sovereign debt rallied amid the ECB’s aggressive stimulus program. In a bid to spark inflation and boost economic growth, the central bank is buying approximately €80 billion a month of government and corporate bonds, effectively pushing down borrowing rates across the 19-member eurozone. The yield on Germany’s benchmark 10-year note declined 13 basis points to close the month at 0.14%. Similar maturities in Spain fell 12 basis points to 1.47%. Meanwhile, the euro fell 3% against the U.S. dollar.

Asia-Pacific

Japanese equities rose amid a weakening yen and encouraging economic data. News of higher-than-expected first-quarter gross domestic product growth added to the notion that the Japanese economy had shaken off the effects of a slowdown in China and a stronger yen earlier in the year. The MSCI Japan Index gained 3% but still lags most developed markets for the year to date, while the broader MSCI Pacific Index climbed 2%. The yen depreciated 4% against the U.S. dollar in May after rising sharply over the first four months of the year.

Japan’s economy grew 1.7% in the first quarter. Although growth remained modest it was higher than forecast, and represented a reversal from the fourth quarter’s contraction. Industrial production and household spending both rose modestly in April from the previous month — above forecasts for declines in the wake of disruptions caused by April’s series of earthquakes in Kumamoto. However, April inflation remained well below the Bank of Japan’s target rates. Core inflation declined, while prices excluding food and energy rose 0.7%, a deceleration from March. Amid this backdrop, Prime Minister Shinzo Abe proposed delaying next year’s planned sales tax hike until late 2019.

Several exporters benefited from the depreciating yen. Shares of Sony traded higher after the company announced it had sold more than 40 million units of the PlayStation 4, surpassing the number of flagship consoles sold by its competitors. Nissan rose after taking a controlling stake in scandal-ridden Mitsubishi Motors, a move expected to give Nissan better access to Southeast Asia. Shares of automakers Honda and Subaru-maker Fuji Heavy also posted double-digit advances. However, shares of Toyota and tire maker Bridgestone both declined amid weak earnings reports. Murata Manufacturing shares also slid after the company projected its first net loss in five years amid a slowdown in the smartphone market.

Australian equities gained 3%. Shares of slot machine manufacturer Aristocrat Leisure surged 20% after the firm announced its first-half profit had more than doubled and that it would raise its dividend. Shares of megabanks climbed modestly following positive statements from credit rating agencies Fitch and Moody’s. Mining companies Rio Tinto and BHP Billiton lagged as iron ore prices sank to a three-month low. BHP Billiton also faces a new multibillion lawsuit for its part in the November dam burst disaster in Brazil. The Reserve Bank of Australia lowered its cash rate to an all-time low of 1.75%, a move that contributed to the 5% decline in the Australian dollar. The MSCI Hong Kong Index retreated 1%, dragged down by shares of real estate investment trusts and other financial companies.

Emerging Markets

Emerging markets stocks lost momentum as investors fretted that the U.S. Federal Reserve would raise interest rates sooner than previously expected. The MSCI Emerging Markets Investable Market Index fell 4% following two months of gains. The materials and energy sectors led declines. Almost all emerging markets currencies lost ground against the U.S. dollar after several months of appreciation. U.S. dollar–denominated bonds, as measured by the J.P. Morgan EMBI Global Index, inched down 0.3%; local currency debt, as measured by the J.P. Morgan GBI-EM Global Diversified Index, fell 5% in dollar terms.

Brazilian stocks retreated after rallying since mid-February. The MSCI Brazil IMI sank 13%, with state-owned oil giant Petrobras and iron ore producer Vale among the largest decliners. The real fell 4% against the dollar. Stocks lost ground as investors paused to see what economic reforms acting president Michel Temer would push to revive much-needed growth in Latin America’s largest economy. Temer was elevated from vice president after Brazil’s Senate voted to suspend President Dilma Rousseff on allegations she disguised a budget deficit. Temer has suggested he will seek to limit subsidies, cap government spending and improve corporate governance at public pension funds and state-run companies. Despite the pullback in equities during the month, Brazil’s year-to-date rise of 24% is one of the strongest among all markets. Elsewhere in Latin America, Mexican stocks dropped 8% as the government tempered its 2016 forecast for economic growth. Telecommunications giant América Móvil was one of the biggest decliners. The peso slid 7% against the dollar.

Chinese stocks edged lower amid worries about the overall health of China’s economy after a batch of economic data for April disappointed investors. Concerns also flared up again over the amount of debt on the government’s balance sheet and how much stimulus the government will provide to help sustain economic growth. The MSCI China IMI fell 1%.

Overall, Asian markets were mixed. Indian stocks rose 2%, helped by favorable quarterly earnings reports at a range of companies. Some of the top gainers included engineering conglomerate Larsen & Toubro and Housing Development Finance Corp., India’s largest mortgage lender. India also passed a national bankruptcy law seen as beneficial to banks. The new bankruptcy rules are a key reform passed on the watch of Prime Minister Narendra Modi, who has struggled to gain support in Congress for business-friendly measures. Elsewhere in Asia, Taiwanese equities advanced 1%. Stocks in Korea and Indonesia fell 5% and 4%, respectively.

South African stocks declined amid a pullback in the prices of mineral-related commodities and heightened political tensions within the government. The MSCI South Africa IMI slid 10%, while the rand depreciated 10% against the dollar — the steepest monthly decline for any emerging markets currency. Shares of mobile phone company MTN Group, Africa’s biggest wireless operator, slumped on concerns over the resolution of a $3.9 billion fine levied by Nigerian regulators.

Turkish equities lost some steam as President Recep Erdoğan further consolidated his power with the appointment of a new prime minister seen as more receptive to Erdoğan’s political agenda. The move affected the country’s currency, with the lira falling 5% against the dollar. Turkey’s central bank also cut the overnight lending rate for the second time in a five-week span. Erdoğan has been pressing the central bank to lower rates. The MSCI Turkey IMI declined 13%, but despite the loss the index remained in positive territory for the year to date.

Stocks in Russia eased following steady gains heading into May. The MSCI Russia IMI shed 5% as investors weighed the risks of Russia’s growing economic ties with China and any slowdown in its economy. Russia has looked to China for business deals due to international trading sanctions imposed over its role in stoking conflict in Ukraine. In the first quarter, Russia’s economy contracted a less-than-expected 1.2% from the prior year. Shares of state-owned natural gas producer Gazprom fell after it was confirmed the company would pay out less in dividends this year.

In debt markets, Qatar sold €10 billion ($9 billion) of eurobonds in the biggest-ever bond issue from the Middle East, where governments are seeking to plug budget holes amid lower oil prices. Russia sold €1.94 billion ($1.75 billion) of eurobonds, its first such sale since facing trading sanctions in 2013 from the U.S. and the European Union. Meanwhile, China sold 3 billion renminbi ($458 million) of bonds in London — its first offshore renminbi bond sale — as the country aims to boost the international profile of its currency. In the corporate market, cash-strapped Brazilian oil producer Petrobras sold $6.75 billion of bonds in two tranches: $5 billion in five-year notes yielding 8.625% and $1.75 billion in 10-year notes yielding 9%.

Developed market returns are in local currency and include net dividends. Emerging markets returns are in U.S. dollars.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice. 

Terms and Definitions
A market capitalization-weighted index based on the results of approximately 500 widely held common stocks.
Bloomberg Barclays Global Aggregate Index represents the global investment-grade fixed-income markets.
Dow Jones Industrial Average is a price-weighted average of 30 actively traded industrial and service-oriented blue chip stocks.
MSCI Brazil IMI is a free float- adjusted market capitalization- weighted index that is designed to measure the equity market results of Brazil.
MSCI China IMI is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results of China.
MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization weighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes.
MSCI Emerging Markets Investable Markets Index measures large, mid and small-cap segments, covering approximately 99% of the free float-adjusted market capitalization of more than 20 emerging equity markets.
MSCI Europe Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of more than 10 developed equity markets in Europe.
MSCI Hong Kong Index is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results of Hong Kong.
MSCI Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of Japan.
MSCI Pacific ex Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of the developed markets in the Pacific region, excluding Japan.
MSCI Pacific Index is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results across 5 Developed Markets countries in the Pacific region.
MSCI Russia IMI is a free float- adjusted market capitalization-weighted index that is designed to measure the equity market results of Russian securities listed on MICEX Stock Exchange.
MSCI South Africa IMI is a free float –adjusted market capitalization-weighted index that is designed to measure the equity market results of South Africa.
MSCI Turkey IMI is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of Turkey.
MSCI United Kingdom Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of the United Kingdom.
MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure results of more than 20 developed equity markets. Results reflect dividends net of withholding taxes.
NASDAQ is a broad-based index that measures all NASDAQ domestic- and international-based common stock listed on the NASDAQ stock market and is calculated using a market-capitalization-weighted methodology.
Represents the U.S. investment-grade fixed-rate bond market.
S&P/TSX Composite Index is a market capitalization-weighted index that is the headline index and the principal broad market measure for the Canadian equity markets. It includes common stocks and income trust units.
The J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified is a uniquely weighted emerging market debt benchmark that tracks total returns for U.S. dollar-denominated bonds issued by emerging market sovereign and quasi-sovereign entities. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.
The J.P. Morgan Government Bond Index – Emerging Markets (GBI-EM) Global Diversified covers the universe of regularly traded, liquid fixed-rate, domestic currency emerging market government bonds to which international investors can gain exposure. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.