Quarter 1, 2024 Market Commentary

• Published on April 8th, 2024

Quarter 1, 2024 Market Commentary

Past performance is not indicative of future results. The information mentioned is for illustrative purposes and should not be considered a recommendation to buy or sell.

Global stock markets experienced strong gains in Q1 due to a resilient US economy and ongoing enthusiasm for Artificial Intelligence. Expectations of interest rate cuts also contributed, though the pace of these cuts is likely to be slower than initially anticipated. Bonds saw negative returns during the quarter.

Note: Past performance is not indicative of future results. The sectors, securities, regions, and countries mentioned are for illustrative purposes only and should not be considered a recommendation to buy or sell.

US

US shares saw a robust advance in the quarter, supported by positive corporate earnings and expectations of rate cuts later this year. Although the pace of monetary easing is expected to be slower due to resilient economic data, this did not deter investor appetite for equities.

The S&P 500 index was boosted by strong corporate earnings, particularly from the "Magnificent Seven" companies. The communication services, energy, information technology, and financials sectors led the gains, while real estate and utilities lagged.

The Federal Reserve kept interest rates on hold at 5.25-5.5%. US inflation rose slightly to 2.5% year-on-year in February from 2.4% in January, measured by the personal consumption expenditure metric. Fed Chair Jerome Powell emphasized caution in deciding when to cut rates. The latest "dot plot" suggests three rate cuts this year.

Data releases showed ongoing economic resilience, with Q4 annualized GDP growth revised up to 3.4%. Nonfarm payrolls were strong, despite a rise in the unemployment rate in February. The ISM manufacturing PMI signaled expansion after 16 months of contraction, rising to 50.3 in March.

Presidential primaries took place in several states, with Donald Trump emerging as the presumptive Republican nominee and Nikki Haley withdrawing from the race in March.

Eurozone

Eurozone shares posted strong gains in Q1, led by the information technology sector due to optimism over AI-related technologies. Financials, consumer discretionary, and industrials also performed well. Improvements in the economic outlook boosted more economically sensitive stocks, while banks benefited from announcements of better shareholder returns. Utilities, consumer staples, and real estate underperformed.

Business activity in the eurozone showed signs of improvement, with the flash purchasing managers' index (PMI) rising to 49.9 in March from 49.2 in February, indicating near-stable business activity levels.

Eurozone inflation continued to cool, with the annual rate dropping to 2.6% in February from 2.8% in January. European Central Bank President Christine Lagarde downplayed the chances of an imminent rate cut, emphasizing caution to avoid reversing any progress.

UK

UK equities rose over the quarter, with financials, industrials, and the energy sector outperforming. Market expectations shifted towards a sooner-than-expected interest rate cut as inflation undershot the Bank of England's forecasts.

The Bank of England's Monetary Policy Committee decided to keep the main policy interest rate on hold at 5.25% in March. Annual inflation fell from a peak of 11.1% in October 2022 to 3.4% in February, the lowest rate since September 2021.

Official data showed the economy entered a technical recession in the second half of 2023, as post-pandemic “revenge spending” waned and higher inflation and interest rates impacted activity. The market reaction to the Spring Budget was muted, suggesting investors anticipated a bolder budget.

Overseas inbound bid activity for smaller and mid-sized UK quoted companies remained significant during the period.

Japan

The Japanese equity market experienced a strong rally, with the TOPIX Total Return index rising by 18.1% in yen terms. Foreign investors played a key role, driven by optimism over Japan's positive economic cycle with mild inflation and wage growth. The Nikkei reached an all-time high, surpassing 40,000 yen. The Bank of Japan's actions at its March policy meeting contributed to this high.

Large-cap value stocks, especially in the automotive and financial sectors, drove the market's performance, alongside a global boom in AI and semiconductors. Domestic and defensive sectors, such as land transportation, services, food, and pharmaceuticals, lagged.

Corporate earnings exceeded expectations, with positive revisions for the current and next fiscal years. The weakening yen provided support, and the inflationary environment is expected to boost earnings for companies with pricing power.

The BOJ overhauled its monetary policy, lifting the negative interest rate policy, abandoning yield curve control, and ceasing the ETF purchase program. This was supported by strong spring wage negotiations results, with initial figures surpassing 5%, the highest in 34 years.

Asia (ex Japan)

Asia ex Japan equities achieved modest gains in Q1, with share prices rebounding from recent lows. Taiwan, India, and the Philippines were the strongest markets, while Hong Kong, Thailand, and China ended the quarter negatively. Taiwan's strong performance was driven by investor enthusiasm for AI-related stocks and technology companies.

Chinese stocks ended the quarter lower as foreign investors remained cautious about the economic outlook. Hong Kong shares also declined due to increasing Beijing control and concerns over China's post-pandemic recovery.

Indian stocks performed well, buoyed by political stability and optimism for a third term for Prime Minister Modi. India benefited from overseas investment in manufacturing and improved infrastructure.

Emerging Markets

Emerging market equities gained in Q1 2024 but underperformed developed markets. China's performance dragged on returns despite select policy stimulus measures. Delayed expectations for Federal Reserve interest rate cuts aided returns but negatively impacted rate-sensitive markets like Brazil.

Peru was the top-performing market, aided by monetary policy easing, including a rate cut to 6.5% and a reduced reserve requirement ratio. Turkey posted strong returns as the central bank raised interest rates by 500bps in March. Colombia also benefited from rate cuts to 12.25% in March.

Taiwan outperformed on investor enthusiasm for AI and tech. India also performed well, helped by currency strength ahead of the general election. Korea posted positive returns but underperformed broader EMs due to weakness in speculative AI and battery stocks. China fell in US dollar terms, with the healthcare sector particularly affected. US-China tensions and attempts to discourage investments into China also weighed on sentiment. South Africa underperformed due to political uncertainty ahead of the general election, while Brazil saw profit-taking after a strong 2023 performance. Egypt had the worst returns due to a significant currency devaluation.

Global Bonds

Q1 2024 saw significant shifts in inflation and interest rate expectations. Initially, markets anticipated faster central bank rate cuts, but expectations were scaled back, except for the Bank of Japan, which increased rates from -0.1% to 0.1%, ending negative rates. The Swiss National Bank cut rates by 25 basis points to 1.5%. The ECB, Bank of England, and Federal Reserve proceeded cautiously, avoiding premature declarations of victory over inflation.

Global economic activity was on the rise, with the US economy outperforming due to sustained consumer spending. The eurozone showed optimism with a service sector rebound and manufacturing revival. China's recovery continued, though the property sector struggled.

Inflation remained a concern, with unexpected high readings tempering enthusiasm for rate cuts. The US and eurozone reported higher-than-expected inflation, raising concerns about persistent service sector inflation.

Government bond yields rose in response to shifting market sentiments. The US 10-year Treasury yield increased from 3.87% to 4.21%, the UK 10-year gilt yield rose from 3.54% to 3.94%, and the German 10-year Bund yield rose to 2.03%. Corporate bonds outperformed government bonds, with UK high yield bonds notable for their performance.

Convertible bonds saw modest gains, with the FTSE Global Focus convertible bond index rising by 1.1% in USD hedged terms. Primary market activity was strong, with demand for new convertibles, though valuations remained subdued.

Commodities

The S&P GSCI Index saw robust growth in Q1, with all components ending positively. Energy and livestock were the best performers, while agriculture and industrial metals saw modest growth. Within energy, all sub-sectors except natural gas experienced strong price growth.

In agriculture, cocoa prices surged due to strong demand and shortages in West Africa. Industrial metals saw mixed performance, with zinc and aluminum prices falling, while copper, lead, and nickel prices rose modestly. Gold and silver prices also increased in Q1.

Digital Assets

Digital asset markets surged in February and March, resulting in one of the strongest quarters in recent history. Bitcoin and Ethereum returned 68.8% and 59.9%, respectively, with Bitcoin reaching a new all-time high on 14 March.

These gains were driven by a supportive macro environment and high demand following the launch of eleven physically backed Bitcoin ETFs in the US. These ETFs saw net inflows of $12.1 billion since inception.

Bitcoin trading volumes increased by 85% year-to-date, with lower correlations between digital assets and traditional risk assets, such as equities.