Signs of Sunshine in the spring
Introduction
No news is good news was the mantra of Q1, without a pandemic or a new war there was nothing to set a negative tone in the first three months of the year. Quite a contrast to the rest of the decade so far.
Therefore it feels like a fairly quiet first quarter for markets in comparison, this summary takes a look at how markets have responded to recent global inflation data, central bank policy and corporate earnings data. The big question for most spectators is when interest rates will start to be cut and which central bank will make that first move.
Macro economic view
Inflation remained a central concern for markets. Despite indications that inflationary pressures were diminishing, unexpected high inflation readings and alarms being raised about service sector inflation in the Developed markets have muted market enthusiasm for imminent rate cuts.
The Federal Bank, European Central Bank and Bank of England all kept interest rates on hold in March and a cautious tone was still very much order of the day. The good news has been that narrative has fully turned towards when they go down rather than if they go up again.
Markets so far haven’t been significantly impacted by the increasing tensions in the Middle East however Crude Oil prices have risen and this could impact short term inflation.
UK Equities
Overall UK Equities rose over the quarter with financials, industrials and the energy sector outperforming along with other economically sensitive areas of the market. Large and mid cap companies posted positive returns at the end of the quarter after a rocky start in January (source: FE Analytics based on bid to bid values from 1st January 2024 to 31st March 2024).
Global Equities
US Equities had a robust quarter thanks to some strong corporate earnings data and ongoing market sentiment about rate cuts later in the year. The S&P 500 was boosted by the “Magnificent Seven” companies where ongoing enthusiasm around AI continues to bolster the Index.
Like the US, Eurozone equities also posted a strong gain in the first quarter of 2024. The IT sector ‘led the charge’ amid ongoing optimism over demand for AI related technologies however utilities, consumer staples and real estate dragged on overall performance.
The Japanese equity market had an exceptionally strong rally in this quarter, marking a historic moment as the Nikkei reached its all-time high. The market’s performance was driven by large-cap ‘value’ stocks as well as the global boom in AI and semi conductor related companies also enjoying strong growth. Additionally, foreign investors, buoyed by increasing optimism over Japan’s positive economic cycle, played a leading role in driving returns.
Asian (ex Japan) equities saw modest gains with prices bouncing back from recent lows. Taiwan, India and the Philippines were the strongest markets with the ongoing theme of investor enthusiasm in AI helping drive strong growth. In comparison Hong Kong, Thailand and China ended the quarter in negative territory.
Emerging Market equities gained over the first quarter but underperformed in comparison to the developed markets. China continued to drag on returns despite some policy stimulus measures. Interest rate sensitive markets like Brazil were negatively impacted by the change in forecasted Federal Reserve Rate cuts.
Bonds
There was a shift in the view of inflation and interest rate expectations. Initially the market believed that Central Banks would act quickly to lower interest rate but these expectations have been scaled back. Some fund houses believe the Federal Reserve will now start to introduce rate cuts in the second half of 2024 whereas others have revised their forecasts to early 2025.
As the quarter progressed, government bond yields adjusted in response to the shift in market sentiment and economic indicators. Global and UK Government bond yields increased across the board (which means that prices fell) .
Corporate Bonds outperformed government bonds with UK High Yield noted as a strong performer.
Source (4th April 2024 Schroders Quarterly Markets Review Q1 2024)
What did this mean for our portfolios?
Our portfolios have benefitted from the strong rally in US equities as we allocate a larger proportion of our global equity exposure to this region alone. Our exposure to Japan and the Pacific region will have also helped show positive returns within our Global Equity proportion.
The use of diversification across geographical regions, use of smaller, mid, and large cap companies as well as holding both government and Investment Grade Corporate Bonds has helped capture positive market movements and soften the effect of any negative asset classes over the period.
The portfolios still remain well placed to benefit from the continuing investor enthusiasm with AI – which is having a positive effect for multiple holdings globally. Our bond holdings will also be well positioned when Central Banks do start to reduce interest rates.
Investment Committee discussions in the last quarter
The investment committee have recently met and are reviewing market information in the lead up to the launch of our new portfolios in June. Discussions have included our position on UK equities and whether now is the time to trim more from this asset class in favour for global stocks which have more growth momentum behind them, partly due to the ongoing AI story.
Due to a change in the investment strategy of our main Property allocation, we will be reviewing whether this will still offer the diversification we require for our portfolios.
We will also be reviewing our Fixed Interest allocations and looking further to see if any ‘tweaks’ will help our portfolios take advantage of future interest rate increases.
Risk Warnings
Introduction
No news is good news was the mantra of Q1, without a pandemic or a new war there was nothing to set a negative tone in the first three months of the year. Quite a contrast to the rest of the decade so far.
Therefore it feels like a fairly quiet first quarter for markets in comparison, this summary takes a look at how markets have responded to recent global inflation data, central bank policy and corporate earnings data. The big question for most spectators is when interest rates will start to be cut and which central bank will make that first move.
Macro economic view
Inflation remained a central concern for markets. Despite indications that inflationary pressures were diminishing, unexpected high inflation readings and alarms being raised about service sector inflation in the Developed markets have muted market enthusiasm for imminent rate cuts.
The Federal Bank, European Central Bank and Bank of England all kept interest rates on hold in March and a cautious tone was still very much order of the day. The good news has been that narrative has fully turned towards when they go down rather than if they go up again.
Markets so far haven’t been significantly impacted by the increasing tensions in the Middle East however Crude Oil prices have risen and this could impact short term inflation.
UK Equities
Overall UK Equities rose over the quarter with financials, industrials and the energy sector outperforming along with other economically sensitive areas of the market. Large and mid cap companies posted positive returns at the end of the quarter after a rocky start in January (source: FE Analytics based on bid to bid values from 1st January 2024 to 31st March 2024).
Global Equities
US Equities had a robust quarter thanks to some strong corporate earnings data and ongoing market sentiment about rate cuts later in the year. The S&P 500 was boosted by the “Magnificent Seven” companies where ongoing enthusiasm around AI continues to bolster the Index.
Like the US, Eurozone equities also posted a strong gain in the first quarter of 2024. The IT sector ‘led the charge’ amid ongoing optimism over demand for AI related technologies however utilities, consumer staples and real estate dragged on overall performance.
The Japanese equity market had an exceptionally strong rally in this quarter, marking a historic moment as the Nikkei reached its all-time high. The market’s performance was driven by large-cap ‘value’ stocks as well as the global boom in AI and semi conductor related companies also enjoying strong growth. Additionally, foreign investors, buoyed by increasing optimism over Japan’s positive economic cycle, played a leading role in driving returns.
Asian (ex Japan) equities saw modest gains with prices bouncing back from recent lows. Taiwan, India and the Philippines were the strongest markets with the ongoing theme of investor enthusiasm in AI helping drive strong growth. In comparison Hong Kong, Thailand and China ended the quarter in negative territory.
Emerging Market equities gained over the first quarter but underperformed in comparison to the developed markets. China continued to drag on returns despite some policy stimulus measures. Interest rate sensitive markets like Brazil were negatively impacted by the change in forecasted Federal Reserve Rate cuts.
Bonds
There was a shift in the view of inflation and interest rate expectations. Initially the market believed that Central Banks would act quickly to lower interest rate but these expectations have been scaled back. Some fund houses believe the Federal Reserve will now start to introduce rate cuts in the second half of 2024 whereas others have revised their forecasts to early 2025.
As the quarter progressed, government bond yields adjusted in response to the shift in market sentiment and economic indicators. Global and UK Government bond yields increased across the board (which means that prices fell) .
Corporate Bonds outperformed government bonds with UK High Yield noted as a strong performer.
Source (4th April 2024 Schroders Quarterly Markets Review Q1 2024)
What did this mean for our portfolios?
Our portfolios have benefitted from the strong rally in US equities as we allocate a larger proportion of our global equity exposure to this region alone. Our exposure to Japan and the Pacific region will have also helped show positive returns within our Global Equity proportion.
The use of diversification across geographical regions, use of smaller, mid, and large cap companies as well as holding both government and Investment Grade Corporate Bonds has helped capture positive market movements and soften the effect of any negative asset classes over the period.
The portfolios still remain well placed to benefit from the continuing investor enthusiasm with AI – which is having a positive effect for multiple holdings globally. Our bond holdings will also be well positioned when Central Banks do start to reduce interest rates.
Investment Committee discussions in the last quarter
The investment committee have recently met and are reviewing market information in the lead up to the launch of our new portfolios in June. Discussions have included our position on UK equities and whether now is the time to trim more from this asset class in favour for global stocks which have more growth momentum behind them, partly due to the ongoing AI story.
Due to a change in the investment strategy of our main Property allocation, we will be reviewing whether this will still offer the diversification we require for our portfolios.
We will also be reviewing our Fixed Interest allocations and looking further to see if any ‘tweaks’ will help our portfolios take advantage of future interest rate increases.
Risk Warnings
- The value of an investment and the income from it could go down as well as up.
- All investing is subject to risk, including the possible loss of the money you invest.
- Past performance is not a reliable indicator of future results.
- Diversification does not ensure a profit or protect against a loss.
- Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income
- This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 2nd January 2024. You are recommended to seek competent professional advice before taking any action.
