VAM Managed Funds (Lux) Commentaries

VAM Fund

A Month of Fragile Markets and Selective Strength

During May, the US stock market continued to show strength moving up significantly during the month despite some mixed economic data which, once again, remained a point of concern. The unemployment rate is still close to its historic lows, currently at 3.9% and perpetuating the idea of a ‘hot’ economy. Meanwhile, the Consumer Price Index (CPI) climbed 3.4% in April and continues to be above the Fed’s 2% target. This CPI number was slightly better than forecast, leading some to speculate that this will lead to the Fed cutting base rates in the fourth quarter but we will probably need to see a downtrend over the next few months to be able to justify this. Following the May FOMC meeting, the narrative came across as somewhat hawkish with Chairman Powell suggesting that the disinflation narrative may need more time to play out as the committee reviews data and gains confidence that inflation is moving closer towards the 2% target. The Fed continues to attempt to engineer a ‘soft landing’ but there are a number of factors that seem to be stubbornly resisting their best efforts to influence this.

Economic growth data has also been a little opaque with early indicators like the Purchasing Managers’ Index (PMI) pointing towards a potential slowdown. This added to the uncertainty surrounding the market’s future direction but did nothing to undermine the confidence we have been seeing amongst investors this year. Proving that even bad news is good news, US Gross Domestic Product (GDP) climbed 1.3% in the first quarter, according to data released last week, which was the lowest growth since the second quarter of 2022. This was significantly lower than analysts’ projections at 1.6% for the first quarter of 2024.

The Nasdaq, Dow and S&P 500 all hit new all-time highs during the month as ten of the eleven industry sectors ended the month positive. The technology sector gained 10% while Utilities added 9%, stimulated by the rush to find companies using and exposed to Artificial Intelligence (AI). Technology has been the dominant driver of the markets since last year, with the large cap tech names driving the Nasdaq 100 Index, which is heavily weighted to them, up 7% during the month and by nearly 30% since last October. May also saw another milestone for Nvidia which became a member of the three trillion-Dollar market capitalisation club alongside Apple and Microsoft. It has been the most visible beneficiary in the relatively recent rush by investors for exposure to the AI theme and the potentially transformative benefits that it may offer. More than half of May’s gains in the S&P 500 were generated by four of the so called ‘Magnificent Seven’. The only one not mentioned above is Alphabet which also has a world leading AI programme. It is important to note that despite the indices’ strong May performance, less than half of the companies in the S&P are trading above their 50-day moving average meaning that they are not contributing to the market’s rise. This leads to the bigger question of whether such narrow market leadership and breadth is sustainable in the medium to long-term. The Manager has considered this a number of times over the last year or so and it continues to believe that good diversification continues to be the best way of mitigating any downside when it eventually manifests.

We will likely see the US consumer come under some pressure at some point and this could lead to some market volatility as the slowing in demand filters its way down to corporate earnings over the next couple of quarters. This may then be the inducement the Fed needs to begin its rate lowering programme. In Europe, the markets are arguably less driven by consumer demand and economic indicators, especially inflation, seem to have been coming down faster than across the Atlantic. The result of this is likely to be a cut in the base rate at the next meeting of the ECB and most likely the Bank of England. It is likely that the Fed will, for once, be watching their Central Bank counterparts on the continent for a clue as to what the impact of a first rate cut in more than two years will be.

Finally, we are finally seeing some of the results of the Indian election, which have proved less conclusive than the exit polls were suggesting. This may mean that Narendra Modi may have to form some uncomfortable alliances if he is to be able to form a government with a majority that allows him to continue his economic expansion of India. This unexpected twist in what is the world’s largest democratic vote is unlikely to be the only election uncertainty we see this year especially as the UK will go to the polls in around a month’s time and the US is readying itself for a hotly contested election in November. The Manager continues to see opportunity in the markets but have positioned itself for the potential for uncertainty as the year unfolds.

VAM MULTI-ASSET FUNDS

VAM Cautious Fund

May was a better month for diversified investors with both global equities and bonds delivering positive returns. A generally positive economic outlook supported risk assets, albeit with some signs of moderation that somewhat tempered concerns of overheating in the US economy. This prompted investors to bring forward their expectations for falling interest rates, which proved particularly supportive for ‘quality’ and ‘growth’ equities. All major developed equity markets posted gains in May with the exception of Japan (despite the weak currency, which is usually a positive for such an export-heavy equity market). Global bonds also generated positive performance as yields moved lower in response to the incoming data, although credit continues to outperform as spreads remain well anchored in light of solid corporate fundamentals. Global investment grade credit outperformed over the month given greater interest rate sensitivity compared to high yield. Oil prices retreated in May having peaked in the previous month on the back of more tempered demand forecasts.

VAM Balanced Fund

May was a better month for diversified investors with both global equities and bonds delivering positive returns. A generally positive economic outlook supported risk assets, albeit with some signs of moderation that somewhat tempered concerns of overheating in the US economy. This prompted investors to bring forward their expectations for falling interest rates, which proved particularly supportive for ‘quality’ and ‘growth’ equities. All major developed equity markets posted gains in May with the exception of Japan (despite the weak currency, which is usually a positive for such an export-heavy equity market). Global bonds also generated positive performance as yields moved lower in response to the incoming data, although credit continues to outperform as spreads remain well anchored in light of solid corporate fundamentals. Global investment grade credit outperformed over the month given greater interest rate sensitivity compared to high yield. Oil prices retreated in May having peaked in the previous month on the back of more tempered demand forecasts.

 

VAM Growth Fund

May was a better month for diversified investors with both global equities and bonds delivering positive returns. A generally positive economic outlook supported risk assets, albeit with some signs of moderation that somewhat tempered concerns of overheating in the US economy. This prompted investors to bring forward their expectations for falling interest rates, which proved particularly supportive for ‘quality’ and ‘growth’ equities. All major developed equity markets posted gains in May with the exception of Japan (despite the weak currency, which is usually a positive for such an export-heavy equity market). Global bonds also generated positive performance as yields moved lower in response to the incoming data, although credit continues to outperform as spreads remain well anchored in light of solid corporate fundamentals. Global investment grade credit outperformed over the month given greater interest rate sensitivity compared to high yield. Oil prices retreated in May having peaked in the previous month on the back of more tempered demand forecasts.

Sources: Rivers Capital Management and atomos.
atomos is the trading name of Atomos Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Atomos Investments Limited is registered in England and Wales, No: 2041819. Registered office: 2nd Floor, 5 Hatfields (alto), London SE1 9PG.

South African Investors: This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).

Disclaimer

VAM Fund, Cautious, Balanced and Growth Funds are compartments of VAM Managed Funds (Lux).

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