Interactive Investor

Month in the markets: reflation trade stays on course

8th June 2021 12:13

Tom Bailey from interactive investor

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The outperformance of UK and European shares reflects investors' continued preference for value and cyclical plays.

May saw markets largely act how they have done since the start of the year: overall gains, with value and cyclical stocks leading the way, buoyed by the continue global economic recovery.

In the US, the main index, the S&P 500, made modest gains, returning 0.7%. This marked the fourth consecutive monthly rise for the index. Year-to-date, it has returned 12.6%. Meanwhile, the Dow Jones Industrial Average and the S&P SmallCap 600 both enjoyed rises of slightly over 2%.

According to Tim Edwards, managing director of Index Investment Strategy at S&P Dow Jones Indices: “Shrugging off inflationary pressures and weaker-than-hoped employment figures, investors in US equities were cheered by steady-as-she-goes affirmations from the US Federal Reserve’s top mandarins, while the recovery trade took a leg up on the unveiling of the Biden administration’s $6 trillion budget proposal.”

However, not all parts of the market performed as well, with the relative performance of value and cyclical stocks against growth stocks continuing in May. Growth and momentum shares both saw losses, with the S&P 500 Growth index losing 0.9% and the S&P Momentum index losing 1%.

In contrast, value shares continued to perform well. The S&P 500 Enhanced Value Index clocked a return of almost 5% and the S&P 500 Value index 2.4%. The value and cyclical-heavy S&P 500 Dividend Aristocrats also enjoyed strong returns, at 2.5%.

The best-performing factor, however, was high beta, with the S&P 500 High Beta Index returning 5.3%. Stocks with high beta are those that rise or fall with the rest of the market. High-beta stocks often tend to be cyclical.

This same dynamic played out in sectors. The value-laden S&P 500 Energy Index returned just under 5.8%. In contrast, the more growth-oriented communication services, information technology and consumer discretionary sectors saw losses – the latter more than 3.8%.

Moving across the Atlantic, European stocks had a positive month. Many indices focused on the continent reached new all-time highs in May, including the S&P Europe 350. Over the course of the month, the index returned 2.7%. Meanwhile, the S&P United Kingdom Index returned almost 1.4%.

The outperformance of European and UK equities compared to the US headline index reflects investors' continued preference for value and cyclical plays. As noted previously, European and UK markets are very cyclical heavy. As with the US, this was also reflected in both factor and sector performance, with the S&P Enhanced Value producing a one-month return of 4.9%.

In terms of contribution to the performance of the headline S&P Europe 350, France led the way followed by the UK, Switzerland and Germany.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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