World Markets Summary:
Equity markets, particularly the US, gave back some of their recent gains as higher-than-expected inflation and generally stronger economic data combined to temper expectations for rapid interest rate cuts this year.
The above combination meant that government bond markets continued to struggle, with yields on US 2-Year Government Bonds moving back up to the 5% level for the first time since last year.
UK equities were among the strongest performers and indeed the FTSE 100 rallied to an all-time high. Bid activity continued apace with Anglo American’s rejection of the biggest mining company in the world, BHP’s $39 billion approach being the highlight.
The Q1 profit reporting season is nearly over in most major markets, and in aggregate, it went better than expected, with a healthy percentage of companies meeting or beating analysts’ forecasts.
Gold and industrial commodities were strong in the month but oil gave up early gains to close the period slightly lower. Investors are increasingly recognising that the green transition is actually quite dependent on industrial metals and this is part of the reason why BHP bid for Anglo American. We expect corporate activity to continue given many mining companies remain well below peak valuations.
The dollar was stronger against most currencies as investors now think the Federal Reserve (Fed) will be last to cut rates, and investors have pushed up the yield on US government bonds. The converse was that Asian currencies were weak and indeed it was widely reported in the financial press that the Bank of Japan (BoJ) intervened in the markets to prevent further yen weakness.
In our March commentary we wrote about the potential for a period of consolidation or perhaps even a pullback so recent events have not surprised us. We still expect inflation to reach the 2.5-3% level across the developed world later this year so we still expect rate cuts in 2024. With China, Europe and the UK all gently accelerating after a period of below par economic activity, we think investors will once again step up to equities before year end.
Our in-depth views on:
Our weightings are based on sterling as a base currency.
United Kingdom (UK)
UK equity markets continued their fine run with the FTSE 100 gaining 2.72% through the month. Strong corporate earnings, anticipated interest rate cuts, commodity exposure, takeover fever and perceived cheap valuations have pushed London’s main index to record highs in April. The move in the mid-cap market was less pronounced but it ended the month 0.92% higher.
The March inflation print eased from 3.4% in February to 3.2% but this was slightly worse than the 3.1% forecast. Food prices continued to fall back and a later reading in April showed shop price inflation having its lowest year-on-year increase since December 2021. Motor fuel prices, however, picked up for the month. Andrew Bailey, Bank of England Governor, struck an upbeat tone on inflation efforts saying that the UK was “pretty much on track.”
There was better news for the economy as official figures showed it grew 0.1% in February, underpinning hopes that we are exiting the shallow recession. This was supported by the later Purchasing Managers Index (PMI) figures in April with British businesses registering their fastest growth in a year. The services sector saw a big rise in activity; however, manufacturing registered a surprise move back into contraction territory. Consumer confidence has continued to improve and is at its highest level in two and a half years. People are feeling more optimistic as inflation eases and real wage growth outstrips inflation.
Meanwhile, UK corporate activity continued apace this month. As mentioned above, Anglo American rejected an initial bid from larger rival BHP Billiton in the mining sector and FTSE 250 Cybersecurity firm Darktrace has agreed a $5bn takeover from US Private Equity Group Thoma Bravo. The value of bids this year has now hit nearly £80bn.
United States (US)
US equity markets endured a torrid time in April with the Dow down 4.92%, Nasdaq negative 4.43% and the S&P declining 4.08%. Optimism over the extent and timing of interest rate cuts has started to diminish, as the lack of progress in the final leg down to the 2% inflation target level has proved tricky. We have also seen the waning impact of the Magnificent Seven as enthusiasm over AI begins to fade in the face of elevated valuations.
Annual inflation accelerated for a second straight month to 3.5%, the highest level since September 2023 and ahead of the 3.4% forecast. Areas such as shelter, transportation and energy contributed to the rise. The increased inflation was also reflected in the Fed’s preferred gauge the Personal Consumption Expenditures (PCE) Price Index that moved up to 2.7% from 2.5% in February. Traders are now shifting back their forecasts on when the Fed first cuts, if they do at all this year.
The Commerce Department reported GDP growth of 1.6% in the first quarter well below analysts’ 2.4% forecast. A sharp increase in imports shaved nearly 1% off the figure and a slowdown in government spending contributed. Measures of underlying demand, however, remained strong with consumer spending continuing to remain robust. Finally, US consumer confidence deteriorated to its lowest level in more than 18 months, with elevated levels of food and gas pricing dominating concerns. So, as we alluded to in prior communiques, there are signs the US economy is slowing and we would expect this to continue.
Europe
European markets were down in the month, with a 3.1% decline in the German DAX and a 2% drop in the French CAC. The European Central Bank (ECB) kept its interest rate at 4.5% for another month but clearly signalled a potential rate cut in June. Headline inflation remained at 2.4%, while core inflation dipped to 2.7%. Encouragingly, service inflation which has been the stickiest component of the Consumer Price Index number began to ease. We think the pace of decline could accelerate in the second half of the year due to the downward pressure from tight monetary and fiscal policies, a loosening labour market, and falling wage growth.
The EU concluded the quarter with better-than-expected GDP expansion, up 0.4% year-over-year and 0.3% quarter-over-quarter. Business activity surged at its fastest pace in nearly a year in April, driven by a recovery in the services industry, and consumer confidence rose to its highest level since February 2022. However, the path to manufacturing recovery remains bumpy, with the Manufacturing PMI falling to 45.7 from the 46.1 reading in March.
Germany, Europe’s largest economy, entered a technical recession, with the economy shrinking for the second consecutive quarter by 0.2% year-over-year. Nevertheless, we believe the downturn may be bottoming out, with a recovery on the horizon particularly as manufacturing has now started to turn. Overall, business sentiment improved for a third consecutive month, a pattern often signalling an economic turning point, and the government raised its growth forecast for this year to 0.3% from 0.2%. A solid rise in services activity drove Germany’s private sector unexpectedly back to growth in April, while the decline in manufacturing began to ease, with the April Manufacturing PMI rising to 42.2.
Asia and Emerging Markets
Asia and Emerging markets were strong relative performers in April with China leading the way. The Hang Seng was up over 7% and is now nearly 20% from the low earlier this year. Japan was one of the only laggards down around 4% after a strong run earlier in the year.
We are continuing to see an improvement in the Chinese economy and the targeted stimulus measures the government are enacting are starting to work. This can be seen in the Q1 GDP growth number, which was confirmed at 5.3% and was significantly better than expected. Fixed asset investment also came in strong in the month and spending related to the Lunar New Year festival was also a support for Chinese economic growth. There was some weaker data including retail sales and industrial production, however in aggregate things are improving. To that end, the biggest publicised issue in China over the last few years has been the property market. Interestingly, the UBS analyst who was the first to call issue in the sector has now turned bullish. So both hard data and sentiment are starting to change which is encouraging.
Elsewhere, the BoJ policy meeting voted to keep interest rates unchanged after raising rates for the first time in 17 years in March. We would expect further rate hikes in Japan as wage inflation seems to now be entrenched and in order to close the interest rate differential with the US.
Fixed Income
Government bond yields rose sharply at both the long and short end of the yield curve during the month, as inflation data in the UK and especially in the US came in slightly above market forecasts. Stronger-than-expected wage growth also alarmed bond investors, and expectations for interest rate cuts have been tempered, with the timing and magnitude of cuts having been re-assessed. With regards to the US, at the beginning of the year, May was considered the most likely start date. However, this has been pushed back and investors are now only anticipating one rate cut this year having expected six at the start of the year.
A notable development over the month was the divergence in rhetoric between the Bank of England (BoE) and ECB are on one hand and the Fed is on the other. The BoE and ECB are increasingly encouraging investors to anticipate rate cuts in the summer while the Fed has become more circumspect, endorsing the markets more muted mood.
Despite weaker GDP in Q1, the domestic US economy continued to grow at or above trend whilst there were encouraging economic developments in both the UK and Europe.
UK housing data and retail sales are examples of better numbers domestically, while German Industrial Production came in much better than expected as well.
In China, Q1 GDP beat expectations with 5.3% growth as fixed asset investment offset weaker-than-expected retail sales and industrial production.
Alternatives
This month marked yet another rife with geopolitical unrest, continuing to push the price of gold to new record highs and Brent oil surpassed $90 a barrel for the first time since October. Copper also breached a milestone, exceeding $10,000 per ton in light of supply concerns and structurally higher demand associated with the energy transition. Gold finished the month up close to 5%, while weakness in the oil price towards the end of the month offset the initial surge, leaving it marginally down for the month. Gold’s now double-digit rally this year has surprised many investors, as it has manifested itself in the face of a strong dollar and rising real rates, which would normally work to gold’s detriment. However, central bank purchases in Q1 were the highest in close to a decade, and this tailwind has managed to outweigh the headwinds at work. The motives for central bank purchasing going forward remain clear, with geopolitical tensions, the US deficit and the unquestionable track record of the precious metal being an effective store of value. One example of this point is the value of a 10kg block of gold, which was the equivalent to the average cost of a US house in 1929 and remains the case almost a century later. Alongside a continuation of central bank purchases, the current headwinds should turn to tailwinds.
Gold should become the favoured safe haven, as the anticipated Fed cut should lead to a weaker dollar and the lower real rates will make the yield-less precious metal more attractive. Meanwhile, oil may see weakness in the near term as we see a continuation of strong US inventories, a slowing US economy and a moderation of tensions in the Middle East.
Property
For the second month in a row, UK house prices fell unexpectedly in April on the back of the recent rise in mortgage rates. The 0.4% contraction was the largest since August and was double that of March’s reading and market consensus. House prices had exhibited a positive trend for six consecutive months, but the recent scaling back of rate cut expectations has caused a resurgence in borrowing costs. Despite this, there was a slew of positive data, with construction PMI returning to expansion, the Royal Institution of Chartered Surveyors moving less negative and mortgage approvals continuing to pick up.
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Important Information
All Index data figures are sourced by Morningstar and correct as at 30 April 2024, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.