World Markets Summary:
March was a strong month for financial assets as positive returns were widespread across bonds, equities and commodities. Hopes for a “Goldilocks” outcome where growth and inflation are not ‘too hot’ or ‘too cold’ but rather ‘just right’ encouraged investors. Such optimism was founded by economic releases such as increased confidence about the future in each of the UK, US and Europe. Retail sales and housing data were strong in the UK, labour costs were lower than expected in Europe, and wage rises eased in the US. Amidst such news flow, central banks in the west sounded more dovish with regards to rate cuts, which supported gold’s rise to another record high. UK assets were further bolstered by a budget which at the margin boosts growth going forward.
Notable developments included the Swiss National Bank (SNB) becoming the first western central bank to actually cut interest rates, the Bank of Japan (BoJ) went the other way by ending its long standing policy of negative interest rates, and all-time highs being reached in several equity markets in Europe as well as Japan and the US.
Momentum has been a very strong factor in explaining performance throughout Q1 and early March saw a continuation of this. Indeed several market commentators have noted that the current very high levels of investor optimism combined with the strong momentum is a danger signal in the short term. We agree that a period of digesting recent strong gains is due, but remain confident on performance for the year as a whole. Our optimism is derived from the scope for strong returns lower down the market capitalisation spectrum and accelerating economic growth in the UK, Europe and China. Share buybacks and robust merger and acquisition activity should lend further support to equities. We also expect western government bonds to deliver total returns from here which are at least in line with current yields, particularly shorter maturity bonds.
Our in-depth views on:
Our weightings are based on sterling as a base currency.
United Kingdom (UK)
UK equities extended gains across both large and mid-caps. A cocktail of positive catalysts including lower than forecasted inflation, more dovish signs of potential rate cuts from the Bank of England (BoE), improving economic data drove the FTSE 100 up 4.85% and the more domestically focused FTSE 250 up 4.56%.
Economic data continued to point to an improving picture for the UK economy. British businesses reported a second month of growth with the Purchasing Managers’ Index (PMI) down slightly from February’s reading, but firmly in expansion territory. Manufacturing activity also surged to a 20-month high in March boosted by domestic demand. On the inflation front, prices rose at 3.4% over the year to February 2024 below economists’ forecasts. This is the lowest level in almost 2.5 years and was the fastest 12-month fall in inflation since 1978. Areas such as food pricing, hotels, and restaurants were a chief component of the drop. As the 2% target looks set to be met during the summer this year, BoE head Andrew Bailey ceded that rate cuts were ‘in play’ at future policy meetings.
Finally, corporate activity for UK companies continued apace in March. US-based International Paper provided a rival bid for DS Smith, setting up a potential bidding war with Mondi. Spirent Communications has also seen a rival takeover bid from US-based Keysight Technologies. UK mergers and acquisitions are now 88% higher than at this time last year according to the London Stock Exchange Group.
United States (US)
Spurred by investor confidence of a ‘soft landing’ scenario, US indices notched up further gains over the month with the S&P 500 up a further 3.22%, resulting in its best first quarter performance in five years. In a sign that the rally was starting to broaden out past the ‘Magnificent 7’, the Dow Jones rose 2.21%, outperforming the Nasdaq which rose 1.23%.
One catalyst for the broadening out was the emergence of regulatory concerns for mega-cap technology companies as Apple was sued by the US Department of Justice, alleging that they built a monopoly over smartphones through anticompetitive means. In Europe, Apple, Alphabet and Meta are under investigation for failing to comply with new regulations around anti-competitive practices. Firms found in breach can be landed with fines of up to 10% of annual revenue.
Economic data continues to remain strong in the US with Q4 Gross Domestic Product (GDP) revised upwards from 3.2% to 3.4%, boosted by an improvement of both consumer and business spending. The unemployment rate at 3.9% has come in below 4% for 25 straight months, the longest streak since the 1960s. Inflation data stalled, showing Consumer Price Index (CPI) unexpectedly rising to 3.2% in February, with core inflation not falling as fast as anticipated. The Fed’s preferred gauge, the Personal Consumption Expenditure (PCE) price index, came in line with expectations up 2.5% over 12 months. Jerome Powell reaffirmed that inflation was ‘along the lines of what we expect to see’ and projections remain for three interest rate cuts this year, but the timing remains uncertain.
Europe
The European Central Bank (ECB) kept its interest rate at historically high levels of 4.5% as well as leaving the Key Deposit Rate unchanged at 4%, whilst revising both inflation and economic forecasts lower. ECB president Christine Lagarde stated that ‘good progress’ had been made in chasing their 2% inflation target but caveated this, noting that the governing council needed further confidence that inflation was falling sustainably, stating ‘we will know a lot more in June’. The central banks now forecast inflation falling to 2% in 2025 rather than 2026, predicting economic growth of 0.6% this year with reacceleration to 1.5% in 2025. In response to relenting inflationary pressures, the SNB unexpectedly cut borrowing costs by 25 bps to mark the first cut in nine years. Given the inflationary progress more broadly in Europe, this action by the SNB may give the ECB a greater inclination to cut rates in the April meeting.
In Germany, retail sales suffered their biggest decline in 17 months, plunging 1.9%. This, alongside high interest rates, weak global demand and political uncertainty has led to a revised economic growth forecast of 0.1% for this year down from previous expectations of 1.3% GDP growth.
PMI surveys encouragingly signalled a stabilisation in the output of goods and services in March, with the Eurozone Composite rising to a nine-month high of 49.9, just shy of expansionary territory. Furthermore, unit labour costs came in at 3.1% and below forecasts of 4.6% whilst the European Commission reported that its gauge of consumer confidence had increased to its highest level in two years. This uptick in business and consumer confidence alongside further evidence that the ECB is poised to cut rates leaves our outlook for Europe largely positive and we believe there is a palpable opportunity to make meaningful returns in the region over the coming months.
Asia and Emerging Markets
Taiwan led performance across Asian markets, with high single-digits returns, closely followed by Korea with mid-single-digits, driven by ongoing semiconductor recovery and Korea’s value-up program gaining traction. Turkey, Vietnam, India, and Japan delivered low single-digit returns, while Shanghai and Hong Kong ended the month flat. In Latin American markets, Mexico rose over 3.5%, buoyed by expectations of increased economic activity in Q1 2024, a robust labour market, and a 25 bps rate cut following seven consecutive pauses. Despite a further 50 bps rate cut, Brazil experienced a slight negative month, but its return over the last 12 months remains strong at 25%.
Notably, China confirmed a 5% economic growth target for this year, which will be challenging due to the absence of base effects. Analysts were underwhelmed by the absence of tangible measures, as the budget deficit target remains around 3%, and the one and five-year loan prime rates were left unchanged. Despite upbeat economic data over the two-month period, including better-than-expected profits from China’s industrial firms, accelerating industrial production, fixed-asset investment growth and retail sales growth, deflationary pressures and the ongoing property market slump continue to dampen investor sentiment.
In Japan, the BoJ made a much-anticipated policy shift, supported by both core and headline CPI increasing to 2.8% year-over-year in February, along with the highest wage rise in over three decades at 3.7% settled in the annual wage negotiations. However, the dovish narrative of the governor reaffirmed market expectations of a prolonged accommodative stance, resulting in a sharp depreciation of the yen to its lowest levels since 1990. We maintain an overweight position in the yen, looking through the recent volatility to the hotly anticipated currency intervention from the BoJ.
Fixed Income
Developed market rates rallied this month, with the UK leading the way with a 19 bps decline on the 10-year and 12 bps on the 2-year gilt. Germany followed with an 11 bps decline on the 10-year, while the US 10-year saw a modest decrease of 5 bps, and the 2-year remained unchanged.
The ECB, BoE, and the Fed kept rates unchanged, as widely expected, but their impacts on yields varied. The BoE’s shift is considered more dovish, evident in its 8-to-1 decision, with one member voting for a 25 bps cut. This has tilted risks towards an earlier rate cut, supported by the economic reality of falling inflation, markedly declining wage growth, and confirmation of entering a technical recession. In contrast, the US trajectory towards a rate cut is less predictable, given robust economic activity and a resilient job market, alongside both headline and core CPI surpassing expectations, despite PCE being in line.
Conversely, the BoJ hiked rates for the first time in 17 years and ended its negative interest rate policy and yield curve control for 10-year Japan Government Bonds (JGBs). On the dovish side, the minimum JGB purchases remains unchanged. In the broader credit market, amidst peaking inflation and sustained robust growth, riskier assets such as emerging market (EM) debt and high-yield (HY) credits remained resilient, while the more rate-sensitive investment-grade (IG) credits outperformed HY by 10 bps. Credit spreads remain tight compared to their historical range, with EM credits the tightest, followed by the US.
Alternatives
Hot commodities were aplenty in March, with oil and gold up 4.6% and 8.6% respectively. Oil hit its highest price level since October courtesy of net buying of Brent Oil futures reaching a 12-month high amidst increasingly favourable dynamics on both the demand and supply side. Fears of a global recession sparked fears of slowing demand earlier in the year, but these fears are beginning to fade. The International Energy Agency (IEA) raised their 2024 demand forecast by 110,000 barrels per day, partially resulting from the strong manufacturing data in the US released at the start of the month. Since the IEA’s forecast revision, official data released at month-end suggested China’s manufacturing sector had moved back into expansionary territory, with the strongest reading in 12 months. This could lead to further upside for oil demand going forward. Meanwhile, after a year of extremely impressive production in the US, Uncle Sam is unsurprisingly struggling to reach the same heights. At the same time, the Organisation of the Petroleum Exporting Countries remains intent on cutting two million barrels a day until at least June and Russia has announced a shifting of its cutting priorities from exports to production, backed by a further 500,000 barrels a day production cut. JP Morgan stated that $100 for Brent Crude couldn’t be ruled out, should the drop in Russian production not be offset by supply elsewhere or weaker demand.
Gold’s exceptional month saw it easily beat the previous record to finish the month above $2,200 per ounce, but this remains a far reach from the inflation-adjusted peak of $3,000. Hence, when combined with the fast approaching rate cuts and unrelenting geopolitical tensions, the precious metal may still have further gains ahead.
Property
UK house prices unexpectedly fell slightly over the month, but increased 1.6% compared to March last year. This marked the largest increase since December 2022 and evidences improving activity from the depressed levels of last year, albeit still subdued by historical standards. Improved affordability caused house approvals to reach the highest level since September 2022 as the average interest rate on newly drawn mortgages fell by 29 bps to 4.9% in February. The Royal Institution of Chartered Surveyors (RICS) residential market survey, measuring the gap between the percentage of respondents seeing rises and falls in house prices, rose to -10 in February up from -18 in January, the least negative reading since October 2022. Further positivity stemmed from the S&P Global UK Construction PMI reaching its highest level since August 2023 fractionally below the 50 threshold aided by new business growth at its fastest since May 2023.
In the US, existing home sales unexpectedly soared 9.5%, marking the largest increase in over a year, aided by increased demand from additional housing supply. In addition, pending home sales in the US rose by 1.6% from February, highlighting the steady progress made from the subdued levels last year.
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Important Information
All Index data figures are sourced by Morningstar and correct as at 31 March 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.