Equities, bonds and commodities continued their rallies through May, and investors are busy with basking in the buying mood - there was no Morningstar mutual fund category posted a loss in May. However, does every investor feel comfortable at this great rally? Let’s take a short break here and have a reassessment to the market.
A year ago, economists and analysts earnestly posited the global economic recovery will be slow and painful, and lots of them tried to compare the crisis to the Great Depression in 1930s. In a nutshell, they think that the global economy was going to experience a bitter L-shape recovery. However, twelve months later, some economic figures in U.S. such as the pace of job losses are better than expected, economists and analysts therefore amended their forecasts accordingly and said the recovery may be a V-shape one instead of a L-shape. The better-than-expected economic figures cheered up U.S. equity investors and U.S. equity funds benefited. For the month, U.S. Large-cap Value Equity funds and U.S. Large-cap Growth Equity funds soared by 6.52 percent and 5.86 percent on average respectively.
Indeed, the current optimism is questionable. Retail sale in U.S. still stalls and some large enterprises, such as GM, are heading to the verge of bankruptcy, proving that the current rally is with a lack of fundamental support. At this point, some conservative economists are now expecting a W-shape recovery, saying that tough time will come back again and the optimism will be gone soon. It is very likely that we will not reach a definite conclusion about which sort of recovery we are going to have, but managing money in a risk-alert manner is always the best way to get through uncertainties.
Bond Story
Helped by the better-than-expected economic figures and an easing of the credit crisis, bond markets shone in May. The up-run is led by corporate debts, which are moderately correlated to the equity market, and the average fund in the Morningstar Dollar Corporate Bond category surged by 5.12 percent during the month. It’s worth noting that corporate debt is showing a trend of decoupling with sovereign debt and this trend is evidenced by falling correlation between Treasury and U.S. corporate 12-month trailing total return in the past few months.
In the bond world, sovereign debt is the biggest loser. There has been a record issuance of sovereign debt worldwide, leading to rising interest rate, and sovereign debt therefore got hurt. For the month, dollar government bond funds gained 0.49 percent only, lagging behind all other products in the same asset class.
Inflation-linked bond funds were a bright spot in May. Morningstar Non-Euro Inflation Linked Bond category and Morningstar Euro Inflation Linked category registered a monthly average return of 7.61 percent and 7.42 percent respectively.
After all the pain we have suffered, deflation now seems to be an empty threat, and on the contrary, investors start to worry about the inflation again. This worry hints a lot to investors as Central Banks around the world may have pressure to raise rate again, and it may add burdens to enterprises in hot water. It is expected that Central Banks will head back into the struggle between inflation and economic recovery.
The Comeback Countries
During the credit crisis, emerging market equities took the hardest hit due to the illiquidity. Indeed, the prospect of the emerging economies remain intact even the sell-off is massive. Risk aversion is apparently the main driver of the sell-off, and hence money is getting back to these promising economies while the investors’ risk appetite is improving. India equity funds and Russia equity funds, which are the most penalized areas in the crisis, become the champion and the runner-up respectively of the monthly fund performance ranking. For the month, average funds in the Morningstar India Equity and Morningstar Russia Equity category were up 35.16 percent and 29.42 percent respectively.
The huge jump of crude oil price also catalyzed the strong rebound in the emerging market and Russia, an energy-heavy nation, becomes the greatest beneficiary. It’s worth noting that Russia equity funds have rebounded for 74.21 percent on average year-to-date as of May-end. In BRIC, Brazil equities also performed a strong rebound lately, and China equities, on another hand, become laggard in May. However, China equities, underpinned by the sizable economic stimulus package, have been outperforming other BRIC countries in the past twelve months.
