This April 2024 market update is brought to you by Marlborough Investment Management

A strong start to the year

In the first quarter, we saw persistent declines in inflation and a smooth deceleration in global economic growth. Despite this slowing growth, the overall market outlook remains optimistic, with an expectation of gradual recovery throughout the year, supported by interest rate cuts and improved corporate earnings.

Central banks have continued to signal that they will begin to progressively reduce interest rates this year. Noting the relative strength of the global economy and corporate earnings, the investment community has changed its view on the prospect of early rate cuts and its expectations are now more closely aligned with central banks’ own estimates.

Equity markets have shown robust performance in the first quarter, largely due to expectations of rate cuts and the stellar performance of a limited number of companies in the technology and healthcare sectors, particularly those strongly positioned to benefit from the rapid growth of AI.

UK

Hawks take a softer line

UK inflation is on a downward trend, with Consumer Prices Index (CPI) inflation falling to 3.4% in February, down from 4.0% in January. Goods inflation stands at 1.1%, significantly down from 13.4% a year ago.

Food inflation, which reached nearly 20% in March 2023, has now dropped to 5% and is expected to continue to fall over the coming months. Wage inflation has also begun to decelerate markedly, with the latest average weekly earnings (AWE) figures showing an annual increase of 6.1% compared to the peak of 7.9% five months ago.

The Bank of England (BoE) kept rates on hold at 5.25%, with the deceleration in both CPI and wage inflation significantly influencing the voting. Notably, the traditionally hawkish members, Catherine Mann and Jonathan Haskel, did not vote for rate increases. It was the first time since September 2021 that none of the MPC members voted for a hike.

US

Economy remains resilient

The Federal Reserve (the Fed) did not deliver a rate cut in March. Inflation, whilst significantly lower than the highs of 2022, edged slightly higher to 3.2% for the 12 months to the end of February.

Employment data remains strong, and the economy appears resilient. Despite rate cuts being further away than initially anticipated, the US stock market continues to go from strength to strength and ended the first quarter at a new high.

Investors will be sharply focused on the next earnings season, which begins in April, to see if companies can continue to deliver on market expectations.

Europe

Inflation falls, sentiment improves

Interest rates remained unchanged at March’s European Central Bank (ECB) meeting, with the bank’s president, Christine Lagarde, hinting that the first rate cut could be in June but not committing to the number of cuts that will follow.

Inflation fell for the seventh consecutive month in February and there are signs of improving sentiment.

Consumer confidence has been slowly improving since the start of the year and Purchasing Managers’ Index data for the services sector has now had two months of expansion, following a rise to 51.1 in March. However, weak international markets and supply disruptions continue to impact the manufacturing sector.

Japan

Wage increases and currency weaknesses

Japanese equities returned over 12% in the first quarter, with “value” stocks outperforming “growth”.

Shunto wage negotiations resulted in the largest wage increases in recent times, which the government sees as a positive in helping the economy escape deflation and maintain a healthy, moderate level of inflation.

The Bank of Japan (BoJ) has ended its monetary policy experiment and abandoned negative interest rates. However, the yen has continued to weaken and the BoJ may intervene to defend the currency.

Asia and Emerging Markets

China’s property market still weak

The MSCI Emerging Markets and MSCI Asia Pacific ex-Japan indices returned 2.48% and 2.6% respectively in March.

Early in the month China’s National People’s Congress met and senior officials announced economic goals and policies for the world’s second-largest economy. These included targeting 5% economic growth this year and maintaining the fiscal-deficit-to-GDP target at 3%.

The MSCI China index continues to lag behind the wider EM and Asia indices as the property market remains weak. Elsewhere in Asia, central banks have kept interest rates steady, and Taiwan and South Korea were notably strong performers.

In Latin America, banks have continued to reduce interest rates, with Mexico implementing its first cut. Markets in Chile and Mexico were up but Brazil saw a decline.

Fixed Income

Who will cut first?

Fixed income has not had the same shining start to the year as equities. Inflation remained higher than forecast and this caused bond yields to increase, pushing down bond prices.

Corporate bonds have outperformed government bonds, highlighting the resilience of companies despite the uncertain economic outlook. Government bonds in Europe outperformed their US counterparts. This was because although Europe has not seen the slowdown many expected, it is still proving less economically resilient than the US and therefore may be closer to interest rate cuts.

In the UK, the BoE is expected to cut interest rates this year, although it is contending with stubborn inflation in the services sector and strong wage growth.

So, while the consensus in the investment community is that the first interest rate cuts will be in June, it remains to be seen whether this will be in the US, UK or Europe. The Fed usually takes the lead with rate cuts. However, given the strength of the US economy, many believe that this time the BoE or ECB may be the first to cut.

Source: Morningstar Direct

Risk Warnings

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest.

Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting portfolios.

Investments may include emerging market, smaller company and commodity funds which may be higher risk than other asset classes.

Investments in fixed interest funds are subject to market and credit risk and will be impacted by changes in interest rates.

Changes in exchange rates may affect the value of the underlying investments.

Investments in Property funds carry specific risks relating to liquidity. Property funds can go through periods, known as ‘gating’, when it may not be possible to trade in or out of the funds and to access your money during such periods.

The portfolios may invest a large part of their assets in funds for which investment decisions are made independently of the portfolios. If these investment managers perform poorly, the value of the portfolios is likely to be adversely affected. Investment in funds may also lead to additional fees arising from holding these funds.

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