Still waters run deep

Both bonds and shares saw modest falls in May, but this masks significant moves under the surface. Funds largely outperformed underlying assets, delivering a slightly negative month but holding on to positive one-year returns.

Global shares ended the month slightly lower, and were it not for a handful of large technology stocks, the outcome would have been much worse. The current investor excitement around artificial intelligence (AI) has supported a small number of stocks. Some of our holdings are well positioned for this technological wave and this was reflected in the performance of Google (+14.5%), Microsoft (+7.1%) and Amazon (+14.4%) this month.

In local markets, stock picking opportunities abound. In Australia, we have been riding the lithium boom through a number of stocks. In May, we were rewarded by the performance of key pick Allkem (+21.2%) which is merging with a US competitor. Some of our other local holdings have reported results in the month; both Xero and Gentrack exceeded investor expectations which saw their stock prices rise 17.8% and 34.2% respectively.

The global bond market was weaker as investors reacted to better US data, illustrating the resilience of the US economy. Like shares, bonds also saw divergent performances. Notably, bank bonds are continuing to claw back the relative losses seen in the wake of the US/Swiss banking crises.

Last month saw the RBNZ surprise investors by signaling an end to its hiking cycle. This precipitated a sharp fall in the NZ dollar. Our Funds have been building foreign currency holdings recently, so this fall in the Kiwi was a welcome boost to Fund performance. We continue to think the NZ dollar can underperform global currencies.

Market dynamics in May neatly capture the opportunity set for an active, diversified manager like Milford. Broad market moves were muted but there are myriad opportunities for us to add value for investors. The outlook is predicated on a tug of war between central banks which are trying to slow inflation, and households whose spending has remained resilient in the face of building headwinds. No matter the outcome, we remain excited about the investment opportunities on offer.