Review of Markets over the first quarter of 2024

While equity investors cheered strong economic data, for fixed income investors it was a more challenging period.

Resilient economic data helped investors get into the Spring spirit during the first quarter of 2024. The US economy was confirmed to have grown by more than expected during Q4 2023, while survey data from the composite Purchasing Managers’ Index (PMI) remained firmly in expansionary territory, boosting investor sentiment. Macroeconomic data elsewhere around the world also showed encouraging signs, further supporting the prospect of a soft landing.

Against this backdrop, global equities posted strong returns, with the MSCI ACWI up 7.4% during the first quarter. Volatility, meanwhile, remained low with the VIX Index – a reference point for equity market volatility – averaging around 14 over the same period.

While equity investors cheered strong economic data, for fixed income investors it was a more challenging period. Stickier inflation prints, resilient economic activity, and the Federal Reserve (Fed) backpedalling somewhat on its dovish December tone combined to drive negative returns for bonds. The shift in the macro backdrop was also reflected in market expectations for interest rate cuts, where the implied number of US rate cuts for 2024 reduced from six to seven cuts at the end of 2023, to no more than three rate cuts in total, starting in the summer. Today’s market pricing is now broadly in line with the Fed’s latest dot plot. As prospects for aggressive rate cuts faded, the yield of the Bloomberg Global Aggregate Index increased by 28 basis points (bps) over the quarter, which led to negative returns of -2.1%.

Other interest rate sensitive asset classes, such as real estate, also suffered on the back of higher interest rates. The Global REITs Index ended the quarter down -1.5%.

In commodity markets, the broad Bloomberg Commodity Index increased slightly by 2.2% last quarter as the fall in gas prices was more than offset by a rise in oil prices on the back of ongoing supply cuts and geopolitical tensions.

Developed market equities had a strong first quarter thanks in large part to the performance of growth stocks, which returned 10.3%.

This was especially true in the US, where the S&P 500 rose 10.6%, outperforming most of its peers, driven once again by the stellar performance of the ‘magnificent seven’ stocks which posted earnings growth of 56% during Q4 2023, helping to lift overall index earnings growth to 8%.

However, the best performing market of the quarter was once again Japan. The Topix ended up 18.1% in the first three months of the year, despite the Bank of Japan beginning normalisation of its monetary policy in March. The central bank announced an end to its negative interest rate policy, yield curve control, and its purchases of equity exchange traded funds and real estate investment trusts.

While some European equity indexes, such as the French CAC 40, reached new all-time highs, European equities overall continued to lag the US and Japan, with the MSCI Europe ex-UK Index posting returns of 9.7%. European stocks did, however, end the quarter on a brighter note. Global investors, concerned about the concentration risks of the US market, may be starting to turn to Europe where cheaper valuations and a potential shrinking of the economic growth gap relative to the US are making the region look more attractive.

Emerging market equities underperformed their developed market peers, with the MSCI EM Index returning 2.4% as investors remained concerned about China’s growth prospects in the absence of any meaningful fiscal stimulus. The MSCI China Index, nevertheless, rebounded 12.3% from its January low on the back of better economic activity data during the Lunar New Year holiday and some easing measures from the People’s Bank of China, which lowered its 5-year loan prime rate for the first time since June 2023.

UK equities lagged most of their international peers with the FTSE All-Share rising just 3.6% since the beginning of the year. The UK market suffered due to its value bias, as well as from the poor performance of the UK economy which was confirmed to have fallen into a technical recession in the last six months of 2023.

In fixed income markets, the Bloomberg Global Aggregate Index fell -2.1% last quarter as yields increased on the back of hotter than expected US inflation data in both January and February.

In Europe, higher yielding countries such as Italy (+0.8%) fared better than Germany (-1.0%). Overall, this helped European sovereign bonds to outperform US Treasuries with a return of -0.6% versus -1.0% for the latter. UK Gilts continued to lag (-1.8%) as still elevated service inflation and wage growth meant the Bank of England maintained its forward guidance, reiterating that policy will need to ‘remain restrictive for sufficiently long’ to return inflation to target.

Within credit, high yield outperformed investment grade thanks to its lower interest rate sensitivity and easier financial conditions. European and US high yield indices posted returns of +1.6% and +1.5% respectively while the Global Investment Grade Index ended the quarter with negative returns of -0.8%.

Emerging market debt was up 1.4% over the quarter, as high real yields outweighed the impact of the strengthening US dollar on the asset class.

All in all, it has been a pretty good start to the year for investors, albeit with further concentration of stock market gains in the large-cap growth space against a backdrop of rising equity market valuations.

While the resilience of the global economy and the prospect of rate cuts in the second part of the year could continue to support this trend, some markets appear increasingly priced for perfection and hence are not immune to profit taking.

Indeed, markets are, as always, threatened by a multitude of economic, environmental, political and geopolitical risks which could lead to volatility ahead. In this context, maintaining a well-diversified portfolio is more important than ever. The good news is that investors now have ample choice to diversify and increase the resilience of their portfolios.

Fixed income markets are more fairly priced today than at the end of 2023 and appear well positioned to help cushion portfolio performance in the case of an adverse growth shock. In the equity market, stocks offering attractive dividend and share buyback yields could also increase the resilience of portfolios.

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