During May, our net asset value return was 0.7% and shareholder returns were -0.9%, in comparison to the FTSE All-World Index return of 0.3%.
May was a volatile month for financial markets, characterised by fresh concerns about regional banks, another rate hike from the US Federal Reserve (bringing US rates to 5%), negotiations surrounding the US debt ceiling, and relatively resilient economic data. In the US, the jobs report for April revealed a significant increase in nonfarm payrolls and the unemployment rate reached a 53-year low, further strengthening expectations for at least one more rate hike. In the UK, the April Consumer Price Index (CPI) report came in at +8.7%, surpassing consensus expectations and signalling a high likelihood of further rate increases from the Bank of England. Clearly, neither inflation nor growth have declined as quickly as expected this year, and while the effects of monetary policy are significantly lagged, the balance of risks now points to no rate cuts in the near future.
Technology stocks outperformed significantly in May, driven by excitement about the potential of artificial intelligence (AI). NVIDIA, a leading provider of processors used in AI applications, raised its outlook far above expectations due to the strong demand for AI[1]related products. The stock has returned over 250% over the year to date, in sterling terms. The NASDAQ, which is heavily weighted towards technology companies, advanced by +7.4% in May, making it one of the best-performing indices over the year to date.
Across sectors, technology hardware and software saw significant outperformance, reflecting the market’s anticipation of the significant role AI will play in shaping various sectors and driving economic growth in the future. The narrow equity rally, led by a relatively small number of companies, has proved particularly supportive of US mega-cap stocks despite rich valuations, high interest rates and the risk of US recession later in the year. Precious metals and oil & gas saw particularly weak returns as commodities prices, as measured by Bloomberg’s Commodity Spot Index, ended the month at their lowest level since August 2021. In May, Brent crude oil prices declined for the fifth consecutive month, natural gas prices in Europe declined by nearly a third and gold prices retreated as the US dollar rebounded.
On a regional basis, returns were mixed, with Europe (-2.3%) and the UK (-2.1%) performing worse than the FTSE All-World Index (-0.2%) and the US (+1.4%). US outperformance stemmed from its relatively high technology weight, while poor performance in Europe followed increasingly downbeat economic data. Notably, the German economy contracted in the first quarter of the year, indicating the beginning of a widely anticipated (shallow) recessionary phase. Despite this, the Trust’s European strategy was the best performer over the month, followed closely by our US Growth strategy, which is well positioned to benefit from further upside in the technology space.
Broadcom (+30.8%), which is held as an overweight position relative to the benchmark, was the most significant contributor to relative returns in May, after Apple renewed its circa $25 billion supplier agreement with the US-based chipmaker (Broadcom silicon can be found within every Apple product currently available.) We expect the agreement, in conjunction with the company’s positioning as one of the largest AI computer/networking semiconductor suppliers globally, to continue to support earnings quality moving forward. Hoya Crop (+22.2%), a Japanese company specialising in optics-related technology that is held at an overweight to the benchmark, also performed well as 2022 operating profit surpassed consensus expectations (+5% year-on-year). Fourth-quarter results for the company’s Life Care segment, which manufactures lenses, were particularly strong, with all major products other than endoscopes achieving double-digit sales growth. Underweight positions in Amazon (+16.0%) and Microsoft (+8.6%) hurt performance in May. Vodafone Group (-20.4%), which is also held at an overweight relative to the benchmark, performed poorly in May after results showed declining revenue across three of the company’s largest markets. Vodafone has been pursuing consolidation in Europe to boost the company’s share price, and talks have recently begun with Three UK about a potential merger that would create Britain’s largest mobile operator.
We ended the month at a discount of 6.0%, widening from a discount of 4.5% at the end of April. Net gearing continued to be conservative at 1.8% (with debt at fair value) for month-end, reflecting our expectation that markets will remain volatile in the short term. Nonetheless, F&C Investment Trust’s corporate structure makes us well-placed to withstand further market volatility, and we remain focused on the long-term opportunities for the benefit of our shareholders.
