Investment Update – 1st May 2024

Market Overview

Global stock markets performed well in the first quarter of 2024, supported by a combination of factors including a resilient US economy, enthusiasm for the potential of Artificial Intelligence (AI), and anticipation of interest rate cuts. However, the pace of monetary easing (interest rate cuts) is likely to be more gradual than investors had initially hoped at the start of the year, as central banks maintain a cautious stance due to lingering inflationary pressures.

In the US, the S&P 500 index made solid progress, bolstered by strong corporate earnings, especially from the group of large tech companies known as the “Magnificent Seven”. On the macroeconomic front, the US economy demonstrated continued strength, with the fourth quarter of 2023 GDP growth revised up to 3.4% and the labour market remaining resilient. The Federal Reserve kept interest rates steady in the 5.25-5.5% range, with Fed Chairman Jerome Powell stressing the importance of prudence in determining when to initiate rate cuts.

US interest rate (Federal Reserve benchmark rate)

Source: Federal Reserve

European equities also rallied, with the technology sector once again leading amid the AI driven optimism. The Eurozone economy demonstrated encouraging signs of strength, and inflation continued to fall gradually, albeit remaining significantly above the European Central Bank’s target. This led President Christine Lagarde to dampen expectations of imminent rate cuts.

In the UK, equities participated in the global rally, with sectors such as energy, financials, and industrials leading the way. However, the UK economy has encountered headwinds, slipping into a technical recession in the second half of 2023 as elevated inflation and higher interest rates took their toll on the economy.  Markets are now expecting rate cuts sooner than previously anticipated, as inflation has slowed sooner than the Bank of England had forecast.

UK inflation

Source: ONS

UK interest rates

Source: Bank of England

Japan performed well, with its stock market surging to the highest level since 1990. The rally was propelled by autos and financials, while semiconductor related shares rode the wave of the global AI and technology boom. Japan’s economy showed promising signs, including mild inflation and wage growth. The Bank of Japan’s decision to shift away from negative interest rates, raising rates for the first time in 17 years, further bolstered investor sentiment.

Japan’s interest rate

Source: Bank of Japan

Emerging markets delivered positive returns but lagged behind developed markets. China’s stockmarket was a drag on overall performance, despite targeted stimulus measures implemented by the government and geopolitical tensions and concerns about the sustainability of the post-pandemic economic recovery weighed on investor sentiment. However, other key emerging markets, such as India and Taiwan, posted strong gains.

In Western fixed income markets, there was a significant shift in interest rate expectations as investors adjusted expectations of the pace and size of interest rate cuts by major central banks, due to persistent inflation. Government bond yields increased (causing prices to fall), with US 10-year Treasury yields climbing from 3.87% to 4.21%, and UK 10-year gilt yields rising from 3.54% to 3.94%. Corporate bonds, particularly high-yield debt, outperformed government bonds.

There were also significant developments in the commodities market during the quarter. The S&P Goldman Sachs Commodities Index, a key benchmark for commodities, posted strong gains with energy and livestock leading the performance. In the agriculture sector, cocoa prices skyrocketed due to strong demand and supply shortages in West Africa, the world’s primary cocoa-growing region.

Hot chocolate prices… (Cocoa price – $ per tonne)

Source: Thomson Reuters, FT

Bitcoin and other digital assets (such as Ethereum) experienced a remarkable resurgence in the first quarter with Bitcoin reaching an all time high in March. We wouldn’t usually comment on these price movements, but following the approval and launch of several Bitcoin ETFs in the United States, digital assets have taken an important step into the mainstream.

Bitcoin price ($)

Source: LSEG, FT

Looking ahead, while the economic backdrop has proven more resilient than initially anticipated, growth is expected to remain subdued in the near term. The stickiness of core inflation may delay the onset of interest rate cuts, with the potential for further market volatility. However, the rally in the first quarter, despite these headwinds, implies there are expectations of a more favourable macroeconomic environment.

Uncertainty remains, but attractive opportunities exist for long-term investors, particularly in market segments that have lagged the broader rally. For example, UK equities continue to trade at a substantial discount compared to their global peers, even after accounting for sectoral differences. Small and mid cap stocks also appear relatively undervalued and could benefit from increased mergers and acquisitions activity.

In this complex investment landscape, a selective approach is crucial. We continue to favour high quality companies with strong market positions, robust balance sheets, and consistent cash flow generation. The ongoing digital transformation remains a major investment theme, with AI adding a new dimension to the technology sector’s growth story. At the same time, a well diversified portfolio that includes assets such as government bonds and commodities can provide a buffer against short-term volatility.

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