Global markets ended a volatile May on a firmer footing, as investors sought clarity from the post trade policy confusion. World markets initially bounced higher on the back of a larger than expected 90-day tariff reduction between the US and China mid-May. This was followed by Moody’s downgrading the US’s credit rating, however, resulting in a broad selloff in the markets. On the back of this, the Nasdaq surged ahead closing May higher by 9.6%, the S&P 500 up 6.3% for the month, recording its biggest monthly gain since November 2023. The Dow Jones lagged somewhat, closing the month higher by 3.9%.

The trade vacillations by President Trump have been euphemistically termed by some as the ‘TACO’ trade, denoting ‘Trump Always Chickens Out’. This has come to characterise the President’s second term, with stocks falling in response to higher tariff announcements and then rebounding when he backs down. US GDP growth is forecast at 2.0% for 2025, underpinned by consumer resilience and capex, but activity data is softening with PMl’s and retail sales declining, signalling a pivot to a stagflation-lite macro regime. Inflation remains sticky, weighing on business and consumer sentiment. Investment intentions are also declining. The Fed continues to hold rates steady while fiscal stimulus is fading. The combined policy stance remains tight, limiting upside for rate sensitive sectors.

The S&P 500 trades at 21.5x forward earnings, vs. the 30-year average of 16.9x. This valuation premium looks increasingly vulnerable with earnings expectations expected to soften. US equities still trade at a premium to Europe (14.2x) and EM (12.2x). 2025 EPS growth is projected at ~9-10% YoY, led by tech, financials, and industrials. Revision breadth has narrowed, however, to just 30%, and 53% of earnings pre-announcements have been negative, the highest since early 2023, indicating weakening forward guidance. Global asset allocators continue to rotate out of US equity exposure. US equities are now underperforming global equities for the first time in two years as Japan, Europe, and Emerging Markets (EM) are benefiting from net earnings upgrades versus the US downgrades.

European markets ended May higher with the Dax ending up 6.7%, and the Cac 40 up by 2.1%. This market strength was despite the continued uncertainty regarding the trade environment and bolstered by Germany’s historic fiscal spending plans.

Real GDP growth for the Eurozone is forecast at 1.1%-1.2% for 2025. The core (Germany and France) continues to underperform due to weak manufacturing activity and subdued external demand, while peripheral regions such as Spain and Italy show resilience driven by infrastructure and services. Policy tailwinds remain persistent. Net earnings revisions remain positive in Europe, led by Germany, Spain, and Sweden. 2025 EPS growth estimates have been revised to +8.0% for Europe vs 0.4% in 2024, driven by Aerospace, Chemicals and Industrials. Eurozone equities trade at a forward 14.2x P/E vs. their 20-year average of 12.8x and at a ~33% discount to US equities, this is among the cheapest globally. Institutional exposure to the eurozone remains below long run average, but this is increasing.

In the UK, the FTSE ended May higher by 3.3% as inflation rose unexpectedly to 3.5% YoY, compared to the 2.6% print in March, with core inflation also rising to 3.8% in April, vs the March print of 3.4%. Continued trade tensions are expected to shave 0.3% off UK GDP by 2026, which reflects global uncertainty, softer global demand, and higher US tariffs. Despite the challenges it faces in calibrating policy amid persistent inflation and higher long-term rates, the BoE is expected to continue with its approach of gradual easing. Overnight index markets are pricing at least one more rate cut by year end.

The Nikkei in Japan closed the month firmer, higher by 5.3% despite the continued concerns around the impact of US tariffs on the Japanese economy. Japanese real GDP growth for 2025 is projected at 1.0-1.2%, driven by resilient domestic demand, capex recovery and a competitive yen. Japan remains a rare Developed Market (DM) beneficiary of global disinflation and easing financial conditions. EPS growth has been revised down to 5.5% (from 8%), with autos/machinery guidance weakening. Japan is becoming a domestic growth play as Spring wage settlements suggest +4% base wage gain, the strongest in decades, pointing to durable rotation toward domestic consumption. We have witnessed strength in durables, housing and services, aided by household balance sheet health (low debt, high savings).

Japan trades at a forward P/E of 14.6x, significantly below US and global markets, with attractive dividend yields and share buybacks supporting valuations. Medium- and long-term signals remain constructive with short-term price action positive due to the April uptick in equity prices. Net flows are rotating from global beta (tech and exporters) to domestic reflation plays with shareholder returns rising steadily (dividends and buybacks giving a >3.5% yield), Japanese equities remain under owned by foreign allocators.

Asian markets followed their Western counterparts firmer, notwithstanding the Trump administration’s plan to broaden the restrictions on China’s tech sector, as well as the continued global uncertainty of tariff wars. This friction was heightened at the end of May when in a social media post President Trump claimed that the Chinese had violated the preliminary trade agreement. Despite this, the Hang Seng ended the month higher by 5.3%, with the Shanghai composite higher by 2.1%, having received a mid-month pick me up on the back of the 90-day tariff cooling off period.

Chinese growth is forecast to slow to 4.0%, in both 2025 and 2026 reflecting the impact of trade tariffs, as well as trade policy uncertainty and deflationary pressures together with weak domestic demand. The broader emerging market real GDP growth has been revised up to ~4.0% in 2025, driven by an expectation that developed markets will continue with policy easing, bottoming of global trade volumes, and strong domestic demand in Asia and select EMs (India, Indonesia and Mexico). Internal demand is supporting India and ASEAN, with foreign direct investment backed capex cycles and consumer resilience, while supply chain relocation trends also remain supportive.

Emerging market equities trade at a forward P/E of 12x-, well below DM peers (Europe: 14.2x, US: 21.5x), highlighting a compelling valuation cushion despite short-term risks surrounding policy flow through, USD trajectory and China stabilisation. Regional disparities remain acute with EM and Asia showing weak short-term technicals, but both are now registering buy signals across medium term signals, with early evidence of bottoming. Fund flows have remained constructive as Asia EM ETFs posted ~$8.8bn in net YTD inflows, concentrated in India, Korea, and Indonesia.

South Africa

Locally, the JSE followed the global trend, with the ALSI ending May higher by 3%, on the back of broad-based gains. The industrial sector was the leading light, ending the month higher by 3.9%, followed by the resources sector, up 2.25% for the month, property up by 1.9% over the period and financials being the laggard up 1.8%. On the stock selection front, Naspers and Prosus were up around 6% for the month as Tencent Holdings reported a better-than-expected rise in sales YoY. Sibanye was up 27.5%, Sasol was up 26.6%, Northam was up 21.5%, Tiger Brands was up 19.4%, and Glencore and Impala were up 16.5% for the month.

Notably, the third iteration of the national budget reflected fiscal adjustments and a weaker economic outlook. Growth was adjusted lower to 1.7% over the MTEF, and Treasury also cut the 2025 real GDP forecast to 1.4%, with weaker fixed investments and exports cited as significant factors.