Markets: Quarterly review Q1-2024:

Expectations for central bank rate cuts drove global equity markets upward through the quarter, helped by the resilient US economic data and continuing AI enthusiasm. Bond markets fell back as sentiment turned negative as markets began to realise that interest rate cuts may be a good deal slower to materialise than were previously expected and already priced into markets at year-end.

US equity markets continued their strong upward momentum albeit still within a relatively narrow spectrum, propelled by stronger corporate earnings alongside rate-cut expectations that might help momentum toward a broadening-out for performance across US equity markets and sectors. The easing expectations for the pace of rate-cuts through 2024/5 had little adverse impact on risk appetite across Mega-Caps as data continued to support investor optimism. The Fed kept rates at 5.25-5.50% as PCE inflation ticked upward to 2.5% YOY for February; Q4-23 GDP was revised upward to 3.4%; unemployment rose slightly in February; and PMI rose to 50.3 in March shifting the economic trajectory to expansion after 16 months of contraction indicators. Donald Trump became the Republican presumptive nominee after presidential primaries were held through the quarter. The S&P500 outperformed, led by IT, financials, energy, and communications, whereas utilities and real estate underperformed.

Eurozone equity markets had a strong Q1-24 as economic indicators continued to stabilise across the region with inflation slowing to 2.6% YOY in February from 2.8% in January; PMI rose to 49.9 in March from 49.2 in February; each adding to expectations for ECB rate-cuts in the coming quarter. IT, financials, industrials, and consumer discretionary sectors outperformed, whereas real estate, utilities, and consumer staples underperformed.

UK equity markets rose through Q1-24 as sentiment perceived UK equities to be relatively cheap after its technical recession H2-23, encouraging in-bound acquisition of UK SMEs and other foreign investor activity. Interest rate-cut sentiment continues to move positively as CPI slowed to 3.4% YOY for February, while the BoE maintained rates at 5.25%. Financials, energy, and industrials outperformed as markets began pricing in rate-cut expectations more rapidly than were previously expected.

Japanese equity markets rallied strongly through Q1-24, driven much by overseas investors taking advantage of the weaker Yen alongside relatively cheap equity prices, fuelled much by increasing optimism for the Japanese economy with its low inflation and mild wage growth. The Nikkei made a record high as the BoJ abandoned its Yield Curve Control, ceased buying ETF’s, and moved its negative rate policy into positive rate territory. While these policy changes added momentum for strong gains across Japans’ equity markets, the Yen weakened on the back of the BoJ remaining accommodative and helped by the centralised union wage negotiations agreeing an above 5% wage rise. Corporate earnings exceeded expectations for the quarter with investor optimism gaining pace on the back of the positive inflationary environment expected to boost corporate earnings 2024/5.

Asian markets (ex Japan) performed modestly in Q1-24 as they began to recover from 2023 cautious sentiment and their recent lows, on the back of stabilising sentiment toward China. Taiwan outperformed on the back of technology sectors showing improved stability despite the re-election of the DPP without a majority. India outperformed on the back of increasing foreign investment into manufacturing and infrastructure, and improved sentiment for continued social stability should Modi be re-elected for a third term. China and Hong Kong underperformed as global investor sentiment remained cautious over the trajectory for the Chinese economy in addition to prevailing geopolitical tensions as the US continued to pressure global corporations away from investing in China.

Emerging markets (EM) delivered a modest Q1-24 performance as global investors delayed expectations for primary central bank interest rate cuts which in turn diffused benefits to EM economies that would otherwise have benefitted from those rate cuts. Colombian equity markets outperformed as its central bank lowered rates twice through the quarter as economic data improved. Peru outperformed on the back of monetary policy changes that cut domestic rates to 6.5% and eased reserve requirements. Turkey also outperformed as it raised interest rates by 5% in March as it extended its more orthodox monetary policy measures. Korea delivered positive performance on the back of IT and battery technologies, despite rising domestic social challenges in their healthcare sector. Brazil underperformed as investors took profits whereas South Africa markets fell on the back of political uncertainty as their May elections draw closer.

Global bond markets suffered volatility through Q1-24 as markets attempted to adjust to a wildly shifting environment between inflationary indicators, economic data, central bank trajectories, risk-on optimism, and geopolitics. Q1-24 began optimistically expecting a high number of small rate cuts through 2024 only to see the prevailing economic data undermine those expectations. Inflation remained elevated despite its downward trajectory and in some cases even rose marginally in the quarter. We saw BoJ end its negative rate policy after 17 years and the Swiss drop their rates by 0.25%, whereas the Fed, ECB, and BoE remained cautious by maintaining their rates. As investor sentiment shifted more cautiously through the quarter, we saw US 10Y Treasuries yields fall to 4.21% from 3.87%; UK 10Y Gilts fall to 3.94% from 3.54%; and 10Y Bunds fall to 2.03% from 1.77%. These falling prices represent a significant change in sentiment going forward to illustrate that market expectations now decidedly leaned toward ‘higher-for-longer’. Corporate and High Yield bonds outperformed Sovereign bonds whereas convertible bonds delivered mixed performance as markets tried to transition the volatile sentiment through the quarter and Issuers remained sidelined by weak valuations.

Commodities performed positively through Q1-24 as demand showed early signs of recovery whereas supply in some sectors continued to be challenging. Energy outperformed over the quarter as the Middle-East challenges and risks remained front-and-centre. Agricultural and industrial metals sectors delivered positive performance as supply/demand metrics stabilised. Cocoa beans spiked higher as substantial shortages became evident in West Africa due to climate change, it is argued. Silver and gold saw positive gains through the quarter.

Digital assets powered higher in the second half of the quarter, with Bitcoin reaching a record high in March, much on the back of increased inflows into newly approved digital-ETFs, and a marked expansion in trading volume across the digital space.

Andy Blandford