Should you invest in equities, bonds, gold, foreign exchange or crypto?

Ela Karahasanoğlu

Diversify the risk, follow the local and global markets!

– As of May 30^th, the US equity index S&P 500 and European stock index Euro Stoxx 50 were both up by +4% and +1.2% on the month, pulling up their year to date returns to +9.8% and +10.2% respectively. Emerging markets were also up on the month with global emerging market equity index MSCI EM was up by +3% on the month bringing its year-to-date return to +5% on the year. The global equity market returns also reflected this reversal in the outlook with global equity indicator MSCI All Country World Index (ACWI) up by +3.9% in May reaching +8.4% return since the year end.

– In line with a drop in long-term bond yields, as of May 30^th, Bloomberg Global Aggregate Bond Index, High Yield Bond Index as well as the Global Corporate Bond Index were all up +0.7%, +1.1% and +1.1% on the month bringing their year-to-date returns to -1%, +3.1% and -0.7% respectively.

–The reversal in negative sentiment in the markets helped crypto currencies which already had an impressive performance in the first part of the year. As of May 30^th, both Bitcoin and Ethereum were up on the month by an impressive +14.4% and +26.2% respectively more than offsetting the losses they experienced in April. With their sizable performance in May, the duo enhanced their significant year to date returns to +61.1% and +63.8% respectively.

–With elevated inflation still in the back of investors’ minds, the price of gold continued its ascent in May. As a brief reminder, investors turn to gold as a store of value and a hedge against uncertainty and inflation. Hence, as of May 30^th, the first month futures contract for gold was up by +2.8% on the month pushing its year to date return up to +14.2%.

– As of May 30^th, Borsa Istanbul Index BIST100 was up by +4.3% in local currency terms (+5% in US dollar basis) over the month springing its year-to-date return in local currency terms to an impressive +40.3% (+28.6% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms underperforming its return in local currency terms is due to the appreciation in the greenback against Turkish Lira by +9.1% since the end of 2023.

–Investors can continue to exploit this scenario by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their bonds, and/or other investments such as gold, US dollar and US dollar index which tend to provide a level of protection to portfolios in market downturn and during periods of volatility. This scenario could also allow for credit investments, such as corporate and high yield bonds, which are priced off of government bonds, to appreciate particularly for longer maturity instruments similar to what happened in May. the road to success in asset management requires a keen focus on proper risk diversification through use of different investment tools and staying on top of not just local but global markets.

Not only the US equity markets, but also most of the developed markets had a sigh of relief when the US core consumer price indicator had its first down tick in six months. Even though this triggered a renewed hope that the US Central Bank FED could start lowering its benchmark rates, markets remained cautious throughout the month which put a lid on some of the returns.

EQUITIES BOUNCED BACK UP IN MAY

As of May 30^th, the US equity index S&P 500 and European stock index Euro Stoxx 50 were both up by +4% and +1.2% on the month, pulling up their year to date returns to +9.8% and +10.2% respectively. Emerging markets were also up on the month with global emerging market equity index MSCI EM was up by +3% on the month bringing its year-to-date return to +5% on the year. The global equity market returns also reflected this reversal in the outlook with global equity indicator MSCI All Country World Index (ACWI) up by +3.9% in May reaching +8.4% return since the year end.

BOND PRICES ALSO REVERSED DUE TO LOWER INFLATION IN THE US

In May bond prices had an up month similar to equities. The main change in May was that the shape of the US yield curve became more inverted (blue line in the graph below) compared to April (red line). What that means is the longer-term yields went down throughout the month as illustrated below.

Source: Bloomberg

The reason for the yield curve getting more inverted (the yield curve is generally expected to be upward sloping) was driven by the markets’ expectation of lower inflation.

In line with this drop in long-term bond yields, as of May 30^th, Bloomberg Global Aggregate Bond Index, High Yield Bond Index as well as the Global Corporate Bond Index were all up +0.7%, +1.1% and +1.1% on the month bringing their year-to-date returns to -1%, +3.1% and -0.7% respectively.

POSITIVE SENTIMENT SUPPORTED CRYPTO PRICES AS WELL

The reversal in negative sentiment in the markets helped crypto currencies which already had an impressive performance in the first part of the year. As of May 30^th, both Bitcoin and Ethereum were up on the month by an impressive +14.4% and +26.2% respectively more than offsetting the losses they experienced in April. With their sizable performance in May, the duo enhanced their significant year to date returns to +61.1% and +63.8% respectively.

GOLD HAD ANOTHER STRONG MONTH

With elevated inflation still in the back of investors’ minds, the price of gold continued its ascent in May. As a brief reminder, investors turn to gold as a store of value and a hedge against uncertainty and inflation. Hence, as of May 30^th, the first month futures contract for gold was up by +2.8% on the month pushing its year to date return up to +14.2%.

CRUDE OIL FINALLY RETREATED ON THE BACK OF INCREASED SUPPLY

Crude oil prices retreated in May after a solid positive streak since the beginning of the year. As our readers will remember crude oil prices are driven by both demand and supply dynamics. Despite the ongoing conflict in the Middle East, a major oil-producing area, and production cuts by OPEC+ countries which continued to threaten the future crude oil supply, some weakness in macroeconomic fundamentals and the additional supply provided by US strategic oil reserves forced the crude oil prices to finally somewhat retreat in May. As of May 30^th, the first month futures contract for US crude oil WTI was down by -4.9% on the month, dragging its year-to-date return down to +8.7%.

TURKISH STOCKS ALSO HAD A STRONG MAY

As our readers may remember, despite the negative outlook in global equity markets in April, the Turkish stock market had a strong month on the back of the mayoral elections which had taken place at the end of March. May was not much different. As of May 30^th, Borsa Istanbul Index BIST100 was up by +4.3% in local currency terms (+5% in US dollar basis) over the month springing its year-to-date return in local currency terms to an impressive +40.3% (+28.6% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms underperforming its return in local currency terms is due to the appreciation in the greenback against Turkish Lira by +9.1% since the end of 2023.

VOLATILITY CONTINUES AS MARKETS TRY TO GUESS FED’S PATH OF RATES

Last couple months we had noted that economists and market players alike could be in for a surprise with not just delayed rate cuts but potentially one or more rate increases. While markets caught up to this possibility in April, they seem to have changed their mind in May causing a level of volatility. With inflationary data at the core of FED’s interest rate decision process, given the path of inflation is still unclear, investors should expect more volatility going into summer and likely into the last quarter of the year.

Investors can continue to exploit this scenario by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their bonds, and/or other investments such as gold, US dollar and US dollar index which tend to provide a level of protection to portfolios in market downturn and during periods of volatility. This scenario could also allow for credit investments, such as corporate and high yield bonds, which are priced off of government bonds, to appreciate particularly for longer maturity instruments similar to what happened in May.

To remind our readers once again, the road to success in asset management requires a keen focus on proper risk diversification through use of different investment tools and staying on top of not just local but global markets.

ELA KARAHASANOGLU, MBA, CFA, CAIA

International Investments Director

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/