SMF monthly update

Welcome to your May 2024 update from the Aviva Investors' Multi Asset Team.

Top 3 investment trends – May 2024

1. Mixed inflation messages

May started with relief rallies across global bond and equity markets as the Fed left rates unchanged and US jobs grew by the slowest rate in six months, +175k for April. Monthly US CPI also increased by its slowest pace since January. However, commentary released from the Fed’s May meeting flagged continuing concerns around the resilience of the US economy, curtailing market optimism. Similarly, we saw cautious sentiment within the Euro Area, as April core CPI increased by +2.9%, and in the UK, where inflation continued its trend downwards but did surprise to the upside. Rate cuts are still expected by most major central banks, as soon as this week for the ECB,  however the mixed data has reduced how many rate cuts are priced in for the year.  

2. Equities back on the rise

May saw global equities bounce back from their retreat in April, with most equity markets in positive territory last month. This was led by developed equity markets, with both the STOXX 600 & S&P 500 reaching new highs. Optimism stemming from signs of slowed momentum in US data dominated investors’ sentiment in May, although this was slightly curtailed by the strength in more recent Euro Area data. Tech stocks continued to drive these new market highs, with Nvidia, up 25% over the month, at the forefront. Separately, a Reddit post also reignited excitement around meme stocks with GameStop up 30% for the month.

3. The commodity craze continues

Precious metals continued to display impressive gains this month with silver up by over 15% and gold posting its 4th consecutive monthly rise, with the latter viewed as a safe haven asset in inflationary macro environments. Copper continued on its positive trajectory with a steady gain in April, +0.8% for the month, as markets pre-exempt an eventual supply-side deficit for the commodity, given its importance in both green energy and AI infrastructure. Whilst commodities were generally on an upwards trend, less headline focus on geopolitical tensions saw Brent Crude oil lose its 4-month streak of gains, down by around 7% in May.

How did SMF perform?

Growth assets

Most equity markets saw gains this month, a turnaround from the declines seen in April, with the exception of Japanese and Emerging Market equities. This was driven by signs of slowing inflation and an easing job market in the US which sparked optimism for rate cuts by key central banks. Our European ESG enhanced strategy was the best performing fund within the equity allocation, fuelled by hopes of the start of monetary policy easing. Our overweight positions in our North American and European equites were positive contributors to performance this month.

Defensive assets

The slowdown in US inflation and jobs growth boosted fixed income markets, with the majority ending in positive territory for May despite the stronger data out of Europe towards month end. Markets continue to expect rate cuts this year from major central banks, albeit potentially fewer cuts, with the ECB expected to make their first cut this week. The Emerging Markets Corporate Bond fund was a top performer in the fixed income sleeve for the month. Our overweight Gilt position and short position in Japanese government bonds were positive contributors – our Gilts holding benefitted from the fixed income rally whilst, in contrast, Japanese bonds sold off with yields exceeding 1% for the first time since 2012.

Uncorrelated assets

Uncorrelated assets have continued to perform strongly in May, with positive performance from our Target Return fund, which benefited from the strong performance of US equity and gold.  Our property fund also delivered strong performance. 

Key active management themes in May

• We opened an overweight equity allocation in Europe, US and Japan
• We have re-implemented our equity overweight, with a preference for additional exposure to European equities. Valuations of European equities continue to be attractive and stocks have benefitted from expectations of a near-term rate cut by the ECB.

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in May 2024.

Market outlook and positioning: what do we believe happens next?

From an active asset allocation perspective, we prefer equities as they have the potential to perform well in a disinflationary macro environment where interest rate cuts by developed market central banks are expected this year (with the exception of Japan). We remain overweight US, European and Japanese equities. US equities have continued to perform well, given strong company valuations and a resilient macro backdrop. In Europe, valuations remain attractive and equities have been boosted by expectations of a June rate cut by the ECB. In terms of Japan, we continue to expect Japanese equities to benefit from stock market reforms to increase efficiency and profitability.

Regarding our fixed-income allocation, we have two key tactical asset allocation positions: short Japanese government bonds and overweight UK gilts. Essentially, we believe Japan is at the start of its hiking cycle with inflationary pressures likely to lead to further rate hikes by the Bank of Japan, supported by recent hawkish commentary by senior officials. In the UK, inflation is falling and whilst UK growth has started to recover, it is still relatively weak compared to other developed economies. Given this, we believe our Gilt position would benefit from the greater likelihood of sooner, and potentially, more rate cuts from the BoE versus other central banks, such as the Fed. 

 Key risks

• The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates.
• Investors may not get back the original amount invested.
• The Fund uses derivatives, these can be complex and highly volatile. This means in unusual market conditions the Fund may suffer significant losses.
• The Fund Invests in emerging markets, these markets may be volatile and carry higher risk than developed markets.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited ("Aviva Investors"). Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.

For further information please read the latest Key Investor Information Document and Supplementary Information Document. The Prospectus and the annual and interim reports are also available on request. Copies in English can be obtained free of charge from Aviva Investors UK Fund Services Limited, St Helen’s, 1 Undershaft, London EC3P 3DQ. You can also download copies from our website. Issued by Aviva Investors UK Fund Services Limited. Registered in England No 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: 80 Fenchurch Street, London, EC3M 4AE. An Aviva company.