GLOBAL MARKET REVIEW & OUTLOOK – MAY 2023

Market Review
The month revolved around the US debt ceiling impasse, central banks in the US, UK and Eurozone raising interest rates and mixed macroeconomic
indicators. Inflation, however, remained the central theme and cause of concern globally. It did show signs of retreating, albeit rather slowly due
to base effects and falling commodity prices. Still, core inflation in many countries remains elevated, and inflation is above target in almost all
inflation-targeting economies. Investors cheered better than expected growth numbers that suggested growth slowdown did not seem as bad
as expected. Higher than anticipated earnings numbers of companies globally also led to buoyant markets.

Equity Market Total Returns

Current Last Month YTD
Region
Globally, equities registered mixed returns in US Dollar terms. What
P/E P/B Total Return (USD) % set the markets apart was a resurgence in technology stocks that
MSCI ACWI 15.8 2.6 -1.0 7.9 surged handsomely following enthusiasm over Artificial Intelligence
(AI). Meanwhile, commodity and materials were the detractors. Over
S&P 500 18.2 4.1 0.4 9.6
the month, US stocks (S&P 500) rose 0.2%, UK stocks (FTSE 100)
MSCI Europe 12.7 1.9 -5.7 9.0 fell 6.5% while Eurozone stocks (MSCI EMU Index) fell 5.7%. Japan
UK FTSE 100 10.4 1.7 -6.5 4.1 continued strong momentum over the month registering an almost 1%
Germany DAX 11.1 1.4 -5.1 11.7
gain while Nikkei 225 climbed above the psychological 31,000 level,
exceeding the level since July 1990. (Source: Bloomberg, 31st May
France CAC 40 12.2 1.7 -7.3 11.6 2023).
Japan Topix 13.8 1.3 0.9 6.8
Within Asia, Hong Kong was the weakest market in May 2023, closely
Korea KOSPI 15.2 1.0 3.9 9.8
followed by China, as the investor optimism seen earlier in the year
Hang Seng 9.1 1.1 -7.6 -7.3 following the reopening of China’s economy after the Covid-19 crisis
Taiwan TAIEX 15.4 2.3 7.3 18.0 faded due to disappointing economic data and weakening demand.
Brazil Bovespa 7.5 1.4 1.8 2.4
Taiwan indices gained significantly backed by technology stocks while
Indian equities logged in second consecutive month of gains in May, as
Mexico-S&P/BMV IPC 12.3 2.1 -2.4 20.8
encouraging economic data boosted sentiment towards the country.
S.Africa Top 40 10.7 2.0 -10.7 -8.5 Investor enthusiasm for AI also boosted share prices in South Korea,
China A50 Index 10.0 1.3 -6.1 0.8 which ended the month firmly in positive territory.
India Nifty 50 20.7 3.6 1.7 3.5
Government bond yields generally climbed over the month but
Source: Morgan Stanley. Data as on 31st May 2023 there was divergence between markets, with weaker data across
The YTD should not be taken as an indication of the returns that may be the Eurozone leading to the market’s outperformance. Yields on the
generated by the Index / Region
shorter end of the curve increased more than the longer end of the
yield curve. The UK bond market underperformed the US and Europe
mainly due to persistent inflation that might drive the Bank of England to raise rates longer than its developed market peers.

The performance of credit markets was mixed over the month, with the US underperforming the European market in both investment grade and
high yield. European high yield performed well, with both positive total returns and excess returns over government bonds, while total returns
were negative in the US.

The debt ceiling deadlock between Democrats and Republicans was the focal point in May and most markets waited for developments on this
front. By early June, the crisis was averted after the US House of Representatives agreed to a deal that suspends $31.4 trillion limit on borrowing
until the start of 2025. This is however subject to approval by the Senate and President. Central banks across the US, UK and the Eurozone
raised interest rates to rein in inflation.

DM core inflation and policy tightening are unusual DM Policy Rate Path (%)

DM Policy Rate Path (%)

Core PCE 6
Percent (%)
YoY Policy Rate Change (Avg Fed & ECB) 5
6.0
4
4.0
3
2.0
2
0.0 1

-2.0 -

-4.0 1

-6.0
Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13 Jan-18 Jan-23
US Euro Area Japan UK

Source : Morgan Stanley Data as on 31 May 2023
The above graph is used to explain the concept and is for illustration purpose only and should not used for development or implementation of an investment strategy

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On the macroeconomic front, US labour market remains strong, despite an uptick in unemployment rate. Inflation edged lower while industrial
activity improved over the month. All eyes remain focussed on the upcoming Fed meeting where the odds have moved towards a rate pause
than a rate hike. In Europe, inflation remained quite sticky, but recent data suggests pressures receding across the euro countries. Still it remains
well above European Central Bank’s comfort level and expectations are for further increases. Europe’s main economy, Germany headed into
recession. Data releases over the month suggested weakness in manufacturing activity. Similarly, UK struggled to tame inflation, forcing the
Bank of England to raise interest rates. Japan surprised investors with better GDP growth driven by inbound tourism. Rising inflation numbers
led to optimism that Japan is on the way out of the deflationary stagnation of the past.

Amidst all these macro, a few points to look at - US unemployment is the lowest since 1968 while German unemployment is near a 30-year low.
Core inflation in the US and Eurozone is the highest in ~40 years. The pace of monetary policy tightening in the US and Eurozone is the fastest
in ~40 years.

Asia and Emerging Markets saw a pickup in investment and domestic consumption. A series of rate hikes by the central banks in Asia helped
temper inflation levels close to comfort zone. A strong supply side pickup across sectors and a roaring investment led demand pushed India’s
GDP higher than anticipated. Data from China confirms sluggish industrial activity in the second quarter as reopening boost faded, and job
market pressures intensified amid a widening negative output gap.

Benign inflation outcomes have reduced the pressure on Asia’s central banks to act aggressively

Core inflation, %Y
7
Inflation in the US
6 US core CPI and EA have risen
US core PCE well above 5.6
5 pre-covid 5.3
Asia core CPI trends
4.7
4 EA core CPI

3
2.4
2 While in Asia,
inflation remains
1 within its precovid
range
0
May-19

May-20

May-21

May-22

May-23

Source : Morgan Stanley Data as on 31 May 2023

The above graph is used to explain the concept and is for illustration purpose only and should not used for development or implementation of an investment strategy

Global Economic Outlook

Global economic growth could be subdued as a result of the protracted war in Ukraine, elevated inflation levels, the impacts of climate change,
and rapidly shaping macroeconomic conditions. Stubbornly high inflation in both developed and developing countries led to one of the most
aggressive interest rate hike in decades. While economic prospects remain subdued, the slowdown will likely be less severe than previously
anticipated.

According to International Monetary Fund (IMF), the baseline forecast is for growth to fall from 3.4% in 2022 to 2.8% in 2023, before settling
at 3% in 2024. Developed economies are expected to see an especially pronounced growth slowdown, from 2.7% in 2022 to 1.3% in 2023. The
growth in emerging markets and developing economies is expected to slow down to 3.9% in 2023 from 4% in 2022 and then pick up to 4.2% in
2024.

While inflation has been easing in recent months, it could remain above most of the central bank targets in 2023. According to IMF, global
inflation is projected to decline from 8.7% in 2022 to 7% in 2023, mainly due to lower food and energy prices and softening global demand. In
developed countries, headline inflation is expected to decline gradually from 7.8% in 2022 to 4.8% in 2023 but will remain well above central
bank targets. Inflation is also trending downward in most developing countries amid lower commodity prices and reduced global supply
constraints and depreciation pressures.

Labour markets in Europe, Japan and the US have remained tight, with low unemployment rates and recurrent staff shortages. Post-pandemic
mismatches between labour supply and labour demand, exerting upward pressure on wages, pose additional policy challenges for the central
banks.

Consumer and business sentiment slightly improved in recent months in most major economies, helped by lower international food and energy
prices. But confidence levels remain far below their long-term averages. Manufacturing activity (measured by the Purchasing Managers’ Index)
appears to have bottomed out. Meanwhile, global financial markets have remained largely resilient despite ongoing banking sector turmoil in
the US and Europe.

The US economic growth could stagnate to weaken in the coming quarters giving the confluence of a tighter monetary policy and falling credit
availability. The UK economic outlook remains challenging. Although inflation could moderate, it is expected to remain elevated in comparison to
recent history. The UK consumer could remain under pressure and sentiment may continue to be weak. In the Eurozone, persistent core inflation
could continue to restrain the purchasing power of households and force a stronger response of monetary policy, with broad macro-financial
ramifications. The Bank of Japan’s stance is likely to remain supportive for equities in the near term and valuations too remain supportive.

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In emerging markets, the reopening of the Chinese economy and continued support from the People’s Bank of China represent significant
sources of support for China and the region more broadly. Domestic demand is strong in Asia ex China, and investment will emerge as an
additional driver in the coming quarters. As for China, consumption is recovering while investment has been a persistent drag. India is benefiting
from a confluence of both cyclical and structural tailwinds. From a cyclical perspective, healthy corporate and banking system balance sheets
mean India can have its independent business cycle driven by domestic demand. Already robust consumption growth will be further boosted by
the recovery in rural demand as the earlier drag from higher inflation on income fades.

Source & Date: Source: Schroders, Morgan Stanley, Bloomberg, Date: 31st May 2023.
Disclaimer: Past performance may or may not be sustained in the future. The Stocks mentioned above are used to explain the concept and is for
illustration purpose only and should not be used for development or implementation of any investment strategy. It should not be construed as
investment advice to any party.
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