The new year started on an optimistic note, a trend that emerged in the final few months of 2023. A combination of relatively steady economic growth and falling inflation increased hopes that interest rates would start to fall relatively quickly in 2024. The macroeconomic environment has dominated the investment landscape over the past few years, mainly inflation and interest rate led, and so it was pleasing that investors started to pay attention to stock-specific fundamentals, albeit this didn’t last long.
The first quarter of 2024 was relatively favourable for most equity markets, tailwinds of solid economic growth (mainly in America) and the Artificial Intelligence (AI) theme, prevailed against the headwind of markets expecting fewer interest rate cuts at a later point in 2024. Bond markets and other interest rate sensitive assets suffered the most during the quarter, due to a combination of fewer expected interest rate cuts, and some profit taking after a strong end to 2023. We remain positive on these areas and can foresee them performing strongly in the near future.
The AI theme continues to cause much excitement amongst investors, and beneficiaries of this theme led the market higher during the first quarter. Six companies, mainly AI related, contributed 60% of the overall gain of the US market in the first quarter. Many of these are part of the so called ‘Magnificent Seven’, though this has gradually turned into the ‘Famous Five’, as shares in Apple and Tesla sunk, on concerns over slowing demand. The US and World stock markets continue to be the most concentrated they have been in many decades and whilst these dominant companies have exciting prospects, they trade on very expensive valuations and investors have very high weightings towards them. There are plenty of very good investment opportunities elsewhere, yet markets seem to be ignoring these.
The Japanese stock market was a notable performer over the quarter as a weak Yen and accommodative monetary policy pushed the markets higher. Japan provides a timely reminder to investors about market concentration and expensive valuations. It was only in February that the market eclipsed its previous all-time high, last reached in December 1989, a 34 year wait. A cautionary tale of expensive valuations and concentration risk.
Elsewhere, UK equities again trailed behind their global counterparts, posting a modest increase, most of which occurred during March. The underperformance of the UK market can be attributed to several factors including its value-oriented (non-technology) bias, compounded by the lacklustre performance of the UK economy, which officially entered a technical recession during the last six months of 2023. That said, we saw a notable continuation in corporate activity due to the cheap valuations on offer. An uptick in bids for UK companies at an average 55% premium to their share prices, shows that certain investors feel the UK is exceptionally cheap. We continue to expect corporate activity and a more conducive environment for the UK market as political clarity increases and confidence in the path of interest rates and the economy improves.
Emerging market equities continued to underperform due to geo-political risks and lingering concerns over the Chinese economy. We feel investors are adequately compensated for these risks, given that valuations are the cheapest they’ve been in decades. Tentative signs of an improvement in the Chinese economy and a slight thawing in Sino-US relations should provide a further tailwind.
For fixed income investors, the period presented greater challenges as interest rates were forecasted to stay higher for longer, which led to falls in government bonds. We continue to believe that government bonds are attractive, with yields over 4% in the UK and the credible prospect of lower inflation and lower interest rates over the coming years. Other interest rate sensitive asset classes, such as property and corporate bonds, also suffered some weakness over the quarter after a strong end to 2023.
The themes of growth, inflation, interest rates and AI are going to continue to influence markets over the coming year, with a step-up in the potential risk posed by an American election. Most markets look highly attractive and arguably the most attractive in over 15 years. Our main concern is the US market given the expensive valuations, concentration risk and outcome of the election. Elsewhere, markets look rather appealing. We expect further volatility this year but are comforted by the attractive valuations on offer. Portfolios are well diversified across geographical markets and asset classes, and we feel this will be of increased benefit throughout the year.
Market Commentary April 2024
The new year started on an optimistic note, a trend that emerged in the final few months of 2023. A combination of relatively steady economic growth and falling inflation increased hopes that interest rates would start to fall relatively quickly in 2024. The macroeconomic environment has dominated the investment landscape over the past few years, mainly inflation and interest rate led, and so it was pleasing that investors started to pay attention to stock-specific fundamentals, albeit this didn’t last long.
The first quarter of 2024 was relatively favourable for most equity markets, tailwinds of solid economic growth (mainly in America) and the Artificial Intelligence (AI) theme, prevailed against the headwind of markets expecting fewer interest rate cuts at a later point in 2024. Bond markets and other interest rate sensitive assets suffered the most during the quarter, due to a combination of fewer expected interest rate cuts, and some profit taking after a strong end to 2023. We remain positive on these areas and can foresee them performing strongly in the near future.
The AI theme continues to cause much excitement amongst investors, and beneficiaries of this theme led the market higher during the first quarter. Six companies, mainly AI related, contributed 60% of the overall gain of the US market in the first quarter. Many of these are part of the so called ‘Magnificent Seven’, though this has gradually turned into the ‘Famous Five’, as shares in Apple and Tesla sunk, on concerns over slowing demand. The US and World stock markets continue to be the most concentrated they have been in many decades and whilst these dominant companies have exciting prospects, they trade on very expensive valuations and investors have very high weightings towards them. There are plenty of very good investment opportunities elsewhere, yet markets seem to be ignoring these.
The Japanese stock market was a notable performer over the quarter as a weak Yen and accommodative monetary policy pushed the markets higher. Japan provides a timely reminder to investors about market concentration and expensive valuations. It was only in February that the market eclipsed its previous all-time high, last reached in December 1989, a 34 year wait. A cautionary tale of expensive valuations and concentration risk.
Elsewhere, UK equities again trailed behind their global counterparts, posting a modest increase, most of which occurred during March. The underperformance of the UK market can be attributed to several factors including its value-oriented (non-technology) bias, compounded by the lacklustre performance of the UK economy, which officially entered a technical recession during the last six months of 2023. That said, we saw a notable continuation in corporate activity due to the cheap valuations on offer. An uptick in bids for UK companies at an average 55% premium to their share prices, shows that certain investors feel the UK is exceptionally cheap. We continue to expect corporate activity and a more conducive environment for the UK market as political clarity increases and confidence in the path of interest rates and the economy improves.
Emerging market equities continued to underperform due to geo-political risks and lingering concerns over the Chinese economy. We feel investors are adequately compensated for these risks, given that valuations are the cheapest they’ve been in decades. Tentative signs of an improvement in the Chinese economy and a slight thawing in Sino-US relations should provide a further tailwind.
For fixed income investors, the period presented greater challenges as interest rates were forecasted to stay higher for longer, which led to falls in government bonds. We continue to believe that government bonds are attractive, with yields over 4% in the UK and the credible prospect of lower inflation and lower interest rates over the coming years. Other interest rate sensitive asset classes, such as property and corporate bonds, also suffered some weakness over the quarter after a strong end to 2023.
The themes of growth, inflation, interest rates and AI are going to continue to influence markets over the coming year, with a step-up in the potential risk posed by an American election. Most markets look highly attractive and arguably the most attractive in over 15 years. Our main concern is the US market given the expensive valuations, concentration risk and outcome of the election. Elsewhere, markets look rather appealing. We expect further volatility this year but are comforted by the attractive valuations on offer. Portfolios are well diversified across geographical markets and asset classes, and we feel this will be of increased benefit throughout the year.