Commentary for April 2024

Market Overview

Following a period of exceptional strength over the past six months, the performance of global equity and bond markets was more mixed during April. The star performer of the month was the UK, which finally recorded a new record high, gaining 3%. Equities in the US and Japan saw profit-taking, falling 4% and 3%, respectively, although both markets recovered somewhat towards the end of the month on the back of solid earnings figures. Emerging markets and Asia closed broadly flat, with the exception of China, where share prices recovered following a poor start to the year. Bonds continued to drift lower, closing off 1% on average.

The sell-off in the US was driven by investors recalibrating to an environment of stickier than expected inflation. The mega cap technology stocks that have led the market in recent months finally saw a correction, as higher bond yields put downward pressure on share prices. Disappointing earnings forecasts at Meta Platform also raised concern over whether the AI euphoria that has powered the bull market may have run too far. Jitters spilled over to other ‘Magnificent 7’ stocks, with stock market darling Nvidia dropping $200bn in value in a single day. However, overall US earnings were 5% ahead of forecast for the first quarter, supported by a robust economic backdrop. Other sectors fared better, with expectations for stronger growth and more persistent inflation benefiting economic-sensitive and commodity exposed stocks.

The gold price continued on a tear, rising a further 2%. The strength in bullion fed through to some blowout numbers for the gold mining companies. The world’s largest, Newmont, exceeded earnings forecast by more than 50%, while Agnico Eagle recorded record profit margins and beat forecasts by 25%. Industrial metals also experienced a strong move up, with the copper price jumping 15%. The oil price whipsawed on escalating tension in the Middle East, surging above $90 level at one point and closing the month 2% higher.

Among major markets, the trend in favour of less fashionable sectors such as financials and resources was most beneficial for the UK, which has a relatively high exposure to traditional ‘value’ areas that performed strongly. Moreover, a £31bn bid by BHP for rival Anglo American further underlined the UK’s low valuation in relative terms. The deal would create the world’s largest copper mining business and may well usher in a period of deal-making in the global mining sector as companies gear up for the energy transition. The recent surge in the copper price has highlighted the current lack of mining capacity in the face of strong demand.

On the economic front, the US remained the bright spot amongst the major regions. The Fed’s Beige Book painted an upbeat view of economic prospects: personal consumption expenditure is growing at a solid pace, rising 2.5% in the first quarter, while overall sentiment rose to the highest level in two years and is now only slightly below its long-term average. This is remarkable given the historically steep rise in interest rates. However, inflation remains a concern, having reaccelerated in recent months. Data for March CPI came in hotter than expected for the third month in a row, rising 3.8%, increasing concerns that inflation is becoming entrenched as the economy powers ahead. As a result, Fed Chair Powell has pushed back the timing of a rate cut to late 2024, likely after the US elections in November.

In contrast, the rate of inflation has continued to trend lower in the UK, falling to 3.2% in March, suggesting that monetary tightening is working. The biggest contribution came from food, with prices rising less than a year ago, although this was partially offset by an uptick in the price of fuel. Overall, the UK has been on a stronger footing since the start of 2024 and is now officially out of recession according to the latest figures from the ONS. The economy grew by 0.6% in the first quarter, having shrank by 0.3% during the final quarter of 2023. The Bank of England didn’t meet in April, but Governor Andrew Bailey appeared optimistic in recent comments regarding the progress of inflation, noting that rates might need to be cut more than the markets are currently pricing in. He went on to state that the UK and the rest of Europe are facing less of an inflation threat than the US. Analysts expect UK inflation to fall rapidly over the course of 2024 to below the Bank of England’s 2% target, opening the prospect of a summer rate cut.

Elsewhere, the global economy is finally receiving a boost from improving sentiment in China. Analysts revised up their outlook for Chinese growth this year as factory activity accelerated more than expected. The overall economy expanded at an annualised pace of 7.5% during the first quarter.

Looking Forward

The US Fed’s dovish policy pivot in December was in hindsight too early and has now been mostly unwound. As a result, US equities have corrected some of the speculative excess built up over the past six months, particularly in the mega cap technology stocks. However, investors remain relatively sanguine about prospects for equities going forward, as the stronger economy that is driving yields higher should also drive-up future earnings, which is supportive of equities.

One of the greatest rebalancing opportunities of the last quarter-century was to have reduced technology holdings in the late 1990s and redeployed the proceeds into economy-sensitive and commodity stocks. Present conditions look very similar. The key question going forward is whether markets are finally experiencing a more sustainable switch in sector leadership away from the excessive dominance of the US market and its ‘Magnificent 7’ stocks. Recent trends are encouraging in this regard. Year to date, the US is no longer the standout performer. Technology stocks have fallen down the pecking order while UK large caps have been aggressively breaking out to new highs.

The commodity bull market is also gathering momentum. Gold, energy and industrial metals have emerged as a leading asset class in recent months. Gold has an ally with almost unlimited financial firepower: the major central banks, which have been reallocating their massive reserve holdings away from US treasuries and into bullion. Longer term, of course, higher commodity prices have the potential to be inflationary, but right now they’re signalling improving global economic demand, and investors are buying into the reflationary story. The CRB commodity price index has climbed by double digits so far this year, led by copper, which is currently flirting with a record high. Goldman Sachs has forecast an extremely punchy further 50% gain for copper over the coming year, predicting that the energy transition will fuel the electrification of everything, with increased demand creating a supply deficit for the conductive metal.

The recovery in commodity prices is providing an additional performance boost to the UK equity market, which is finally starting to play catch-up having been left behind in the global tech-focused boom. Record highs tend to produce more record highs, and with the market continuing to look attractively valued, there’s reason to think it can continue to perform well. Recent economic data has been more upbeat and this, combined with the prospect of lower rates, is a positive environment for equities. Along with several of the leading resource stocks, the index also includes a number of blue-chip companies with attractive global brands. Many of these feature strong cashflow, solid yields and increasing shareholder returns through higher dividends and share buy-backs yet are valued at a discount to similar stocks listed elsewhere.

Our Strategy

On a global basis our standard portfolios remain overweight the UK, Japan, Asia and emerging equity markets. These regions have lagged the US and valuations look much more appealing.

While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. Bonds also provide some diversification in the case of slower growth, but do not protect portfolios from the possibility that inflation remains higher for longer (except for index -linked bonds). Incorporating alternative assets such as gold and commodity stocks allows us to hedge against inflation and other potential risks and capitalise on wider opportunities outside of traditional bonds and equities.

We have held exposure to gold bullion and miners across standard portfolios for a considerable period, through a physical bullion ETF and the Merian Gold & Silver fund. These have provided an essential part of our diversification strategy that has helped reduce volatility and smooth returns in turbulent times. They have also added an additional source of returns as the gold price has surged over the past year to a new record high. Other positions in the commodity space are the Guinness Global Energy and Blackrock Natural Resources funds, which have provided a further boost to performance this year.