Prosperis Investment Commentary Quarter 1 2024
The first quarter of 2024 has seen global markets make great strides to recover losses from this time last year with valuations approaching the highs last seen in November 2021. Better than forecasted inflation numbers buoyed stock markets in Europe whilst the US continues to defy the naysayers as their economy continues to grow. However, in the middle of all the good news, there remains some geopolitical concerns. The Ukraine is still battling on all fronts with the Russian aggression and there are few signs this conflict is coming to an end. The dreadful situation in Gaza seems no nearer an end as politicians and observers around the world call for a unilateral ceasefire.
While equity investors cheered strong economic data, for fixed income investors it was a more challenging period. Resilient economic activity and the Federal Reserve backpedalling somewhat on its dovish December tone, combined to drive negative returns for bonds. The shift in the macro backdrop was also reflected in market expectations for interest rate cuts, where the implied number of US rate cuts for 2024 reduced from six or seven by the end of 2023, to no more than three in total, starting in the summer.
The best performing market of the quarter was Japan. The TOPIX ended up 18.1% as at the end of March despite the Bank of Japan beginning normalisation of its monetary policy. This was the high mark for the index after finally catching up with its previous all-time high set in 1998. While some European equity markets reached new all-time highs, European equities overall continued to lag the US and Japan, with the MSCI Europe ex-UK Index posting returns of 9.7%. European stocks did, however, end the quarter on a brighter note.
Inflation & Interest Rates
With the resumption of a more normal inflation position, observers are asking when will central banks take their foot off the interest rate brake. Bloomberg’s Economic panel seems to have confirmed the general view that we will see relatively few cuts in Q2 in the US and the rest of the world will more than likely follow suit in Q3. This means UK mortgage rates will remain high for a little longer continuing the financial squeeze on households.
Tax cuts will complicate efforts to bring down inflation. Even before any additional fiscal stimulus, the Bank of England expects inflation to rise in the second half of the year, after returning to target in the first half. This suggests that UK interest rate cuts could be limited with some leading economists expecting the UK Base Rate to end 2024 at 4.5%.
Source: ONS monthly outturn data up to Feb 2024, then Q2 2024 quarterly expectation from Bank of England staff via MPC minutes of 21 March 2024
Summary
Fund managers and investors need to be mindful there are a number of questions that remain unresolved as we move further through 2024 with elections front of mind for many. Whether inflation is sustainably back on a path to 2% remains to be seen despite the recent good news. Corporate earnings growth estimates for 2024 are reliant on tech giants continuing to deliver against an increasingly high bar and against this backdrop, balance and diversification in portfolios remains essential. Whilst the recent news has produced good returns, no one should be complacent whilst the world continues to struggle with war and famine, either of which could turn things the wrong way.
If you would like to discuss this further, please speak to your Prosperis adviser on 01423 223640 or advice@prosperis.co.uk