Optimism that the worst of the economic recession is over helped boost market performance in May as equities rallied strongly for a third consecutive month.

While there were relatively small losses for four of the 24 Morningstar Canada Fund Indices that track equity funds, the top three indices registered double-digit gains, according to preliminary performance today released by Morningstar Research Inc.

By far, the top performer was the precious metals equity fund Index, which advanced 23% in the month, largely thanks to a strong rally in gold. Gold prices rose by 10% for the month, bringing the spot price up to US$975 — a level last seen in late February. Silver also had a tremendous run.

“The weakening U.S. dollar and inflationary concerns stemming from the printing of stimulus money have supported the upward momentum for these precious metals, which are often viewed as an inflation hedge,” says Nick Dedes, fund analyst for Morningstar Research.

The natural resources sector also benefitted from the rebound in investor confidence, with an upswing of nearly 30% driving the price of crude oil past US$66 per barrel in May. The natural resources equity fund Index rose 13.6% in the month.

Ranking third after precious metals and natural resources funds, was the sector-diversified Canadian equity, which, in part, rode the commodities resurgence to a 10.8% return. “The Canadian equity market stood out with its robust performance backed by a strengthening loonie and rising commodity prices,” Dedes says.

Indices that track various segments of the Canadian equity market dominated the top 10 list, including gains of 8.1% for Canadian focused equity, 8.5% for Canadian income trust equity, 9.5% for Canadian small/mid cap equity, and 9.6% for Canadian focused small/mid cap equity. The Canadian dividend & income equity fund Index rose 7.9%.

Meanwhile, the emerging markets equity Funds Index ranked sixth after holding fourth place in the rankings of the previous two months. The sector, which has been particularly hard-hit by the global economic slowdown, continued its strong rebound — the fund index gained 10.9% in March and 10.6% in April — with a return of 8.9% in May.

In all, just seven of the 44 Morningstar fund indices ended the month in negative territory, with some of the biggest losses prompted by currency changes. The worst performance, a decline of 3.3%, came from U.S. small/mid cap equity, while the more broadly based U.S. equity index fell 1.9%. “The U.S. dollar depreciated roughly 8% against the Canadian dollar and saw similar declines relative to other major currencies, including the euro and the British pound,” Dedes says.

Two sector-specific indices — health care equity and science & technology equity — had losses. While health care funds were down a modest 0.9%, Science & technology funds saw a loss of 3.2% in May, marking a stark reversal of the trend in March and April when the index gained 9.2% and 8.8%, respectively.

Final performance figures will be published on next week.

IE