Giles Warren Financial Blog

 There’s an old stock market adage which says “Sell in May and go away.” This year, “Sell before May and go as far away as possible” might have been more appropriate, as world stock markets tumbled throughout the month. Only one market – Malaysia – managed a gain in the month and several recorded double digit falls.
To no-one’s surprise Greece was the biggest culprit, with the market falling 30% to 485. Spain slumped a further 13% as fears about a possible bailout continued to grow, with the stock market finishing just above the psychologically important 6,000 barrier. The Spanish market is now down 30% on a year-to-date basis.

May was the month when the financial crisis in Europe gave us another new word: ‘Grexit’ – a Greek exit from the euro. The term was coined after the May election results saw the pro-austerity coalition lose its majority. Prior to this month’s election, one US hedge fund manager speculated that the Grexit could happen as early as July, with Alexis Tsipras, the leader of Greece’s far-left coalition, saying the terms of the recent bailout deal were “null and void.”

May also saw Francois Hollande replace Nicolas Sarkozy as French President – Sarkozy becoming the 11th European leader to lose an election since the crisis began. In the UK the local council elections saw sweeping gains for the opposition as Labour captured 39% of the vote.

“The politics of austerity have suffered a humiliating defeat” was a comment made on the Greek election: it could equally have been applied to the results in France and the UK.

UK

If it hadn’t been for the local election results May would have started reasonably well for David Cameron, with the CBI forecasting that Britain would return to growth in the second half of the year and the number of unemployed falling to 2.63 million.

Unfortunately, Clinton Cards then went into administration, putting 3,500 jobs at risk and it was confirmed that the wet April had hit retail sales hard, with a drop of 3.3% on the previous month. With the rain continuing it is doubtful if the May figures will show much improvement.

One of the more worrying reports was in the Times, who highlighted findings from the Centre for Economics and Business Research. They warned that those areas of the UK heavily dependent on the public sector would “feel the pain” for the next five years as the public sector continued to be squeezed. The North East of England, Northern Ireland, Wales and Scotland would be particularly badly hit.

Like virtually all the major stock markets the UK fell sharply in May, buffeted by fears about Europe in general and Spanish banks in particular. The FTSE closed at 5,306 – down 7.5% on the month. It was also confirmed that house prices had fallen back in April, with the BBC reporting that the housing market was “now in gentle decline.”

Europe

While the political crisis in Greece grabbed the headlines in Europe, perhaps the most worrying developments were in Spain, where many banks now appear to be in real trouble. The Bank of Spain reported that the problem property loans of all Spanish banks totalled €184bn at the end of 2011 – equal to 60% of all property loans. This is not something which will be solved quickly or easily.

Most commentators now seem to accept that the euro cannot continue in its current form, but with the cost of the break-up being put at between €300bn and €1tn everyone is anxious that if there are to be changes, they should be as orderly as possible. Whether events in Greece and Spain will allow this is open to doubt.

When you factor in the different approaches to the crisis favoured by Angela Merkel and Francois Hollande, there is little doubt that the uncertainty in Europe is going to continue through the summer.

This was perhaps reflected in Germany where Lufthansa announced plans to shed 3,500 jobs. The German stock market was down nearly 8% by the end of the month, finishing at 6,264. However, it remains up on a year-to-date basis.

All the other major European markets fell during the month. The performance of Greece and Spain has already been noted – and with its stock market falling by nearly 13% in the month, it is difficult not to think that Portugal could be the next country into intensive care.

United States

The much anticipated stock market floatation of Facebook finally happened in May – and immediately ran into trouble. The initial floatation price put a value of over $100bn on the company, which drew scorn from many seasoned observers, one of whom described the shares as ‘muppet bait.’ By the end of the month the shares had fallen to $27, making the company worth a paltry $57bn.

Warren Buffet added his voice to the scepticism and instead spent $142m of loose change on buying 63 local newspapers.

It was at least a good month for Mitt Romney, who finally clinched the Republican nomination and will face President Obama in November. Opinion polls still have Obama in the lead but the race will be tight and bad economic news could tilt the balance in Romney’s favour.

At the moment though, the economic news from the US favours the President. Although the trade gap widened in March, inflation continues to fall and the US GDP rose 2.2% in the first quarter. However the stock market was not immune to the worries coming out of Europe, and the Dow fell by just over 6% in the month, finishing May at 12,393.

The Far East

‘China heading for a well needed crash,’ screamed the Money Week headline on May 21st. Yes, there are warning signs in China and – unsurprisingly given the current world economic climate – both imports and exports have slowed. But when the definition of ‘slowing’ is that exports only rose by 5% in the year, and the country is posting a $19bn trade surplus in the month, you have to think that a lot of Western governments would give their right arm for such a ‘crash.’

Conversely the trade gap widened in Japan as more fossil fuels were imported and exports of steel and plastics reduced – largely due to lower demand from China. In what might be an encouraging long term trend for the Japanese economy, bank shares rose as the demand for corporate borrowing increased.

Both the Japanese and Hong Kong markets fell during May – Japan was down just over 10% to close the month at 8,543 and the Hong Kong market recorded a fall of over 11% to 18,630. China, however, was virtually unchanged with the market finishing the month at 2,385.

Emerging Economies

All the emerging economies around the world fell in May (with the honourable exception of Malaysia). Even the rock star stock market that is Venezuela couldn’t buck the trend, although it remains a healthy 105% up on a year to date basis.

Worryingly though, Brazil, India and Russia all recorded double-digit falls for May, with the Russian stock market tumbling by nearly 20% to close at 1,282. The BRIC countries (Brazil, Russia, India, China) are theoretically the main drivers of growth in the developing world, so it will be interesting to see what happens in June.

And finally

Clearly May was a difficult month – and yet it was a month which saw Edvard Munch’s iconic painting ‘The Scream’ sold for £74m. Andy Warhol’s ‘Double Elvis’ fetched $37m and a Mark Rothko painting went for $86.9m. It was revealed that head of the IMF, Christine Lagarde, pays no tax on her £300,000 annual salary – perhaps not able to afford a painting yet, but clearly moving in the right direction.

It was also revealed that wages for Premiership footballers are at a new high, with Manchester City spending 114% of their income on wages. Some pundits were reminded of the Greek railway system, which famously took £80m a year in ticket sales and spent £500m on salaries.

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