Commentary for March 2024
Market Overview
Global equity and bond markets advanced by 3% and 2% respectively in March, as a raft of central bank meetings signalled that hopes for rate cuts this year remain on track. Stocks have been on an absolute tear since last October, when bond yields started sliding from multi-year highs. Five months later animal spirits remain alive and well. In the US, Reddit’s IPO had a scorching debut, rising as much as 67% on its first day of trading, valuing the loss-making company at over $2 billion. The mega cap tech stocks that have led the market in recent months finally paused for breath, as the recovery broadened to deliver strong gains in small caps and more cyclical areas of the market, driven by stronger economic data. This trend was most beneficial for the UK, which recorded the strongest performance among major markets, rising 5% to close within touching distance of a new record high. Japan also closed in on an historic milestone, with 40,000 on the Nikkei within reach.
Gold hit a fresh record rising to above $2,300 an ounce, having burst through previous multi-year resistance in February. The move was fuelled by expectations of US rate cuts, elevated geopolitical risk and strong buying by central banks, particularly in China. The oil price also surged to touch the $90 level, with OPEC+ set to affirm its policy of production cuts amid rising tensions in the Middle East. The International Energy Agency warned of a supply deficit throughout this year.
On the economic front, the global recovery is showing signs of broadening. Manufacturing has been in a trough in recent years, partly due to China’s slump and partly due to the post-Covid hangover, as consumer spending switched focus to services once economies re-opened. This left a surplus of inventory for consumer goods, which has now been worked off. The ISM gauge of US manufacturing activity showed production back in positive territory after contracting for sixteen straight months. The same effect can be seen in the UK, where growth is gradually starting to pick up and recent trading statements among consumer-facing companies have been generally more upbeat, with comments from Next plc’s CEO that “it has been a long time since we started a year in in a more positive frame of mind”. The annual pace of UK inflation slowed to 3.4% in February, driven by a slowdown in food and restaurant costs. This is the lowest level since September 2021, and a welcome fall from the 4% recorded in the previous two months. Chancellor Jeremy Hunt expressed optimism that prices would continue to slow further, raising hopes for rate cuts. The latest forecasts from the OBR call for inflation to average at 2.2% over 2024, with the headline rate back below the official target of 2% well before year end.
The Swiss National Bank, citing progress on inflation, became the first among global peers to cut interest rates, while the US Fed, the ECB and the Bank of England all chose to remain on hold. Investors were relieved to see that US policymakers are still on track to cut rates three times this year despite recent strength in the economy. Since the Fed’s last update in December, US data has shown a mild re-acceleration of inflation and another likely solid quarter of GDP growth. However, the latest statement gave markets the impression that the US central bank is becoming more relaxed about inflation and is hopeful of being able to cut later this year, even though it expects the US economy and labour market to remain solid. US inflation rose 3.8% in the year to February, declining slightly from the previous month. The new central bank forecast for 2024’s inflation was boosted to 2.6% from 2.4%, while the growth forecast was raised from 1.4% to 2.1%.
As expected, the Bank of Japan scrapped the world’s last remaining negative interest rate, finally ending their unorthodox experiment where lenders pay you to borrow from them. Policymakers are becoming increasingly confident that the economy has finally exited the deflationary era, with Japan’s core CPI now at 2.8%. Moreover, the shunto spring wage negotiations between unions and employers yielded a 4% pay rise for Japanese workers, the largest increase in more than 30 years.
Markets also received a boost from improving sentiment in China, where data for February showed a 7% rise in factory output, with the manufacturing PMI snapping a five-month contraction to rise to the highest in a year. Consumer prices also rose for the first time since August. The CPI increased 0.7% in February from a year earlier, rebounding from its biggest drop since 2009 a month earlier. The stronger data came after the country’s leadership outlined further support measures to boost the economy and set a GDP growth target of 5% for 2024.
Looking Forward
The great inflation scare that gripped the global economy after the pandemic is no longer keeping central bankers up at night. Recent messaging is that they are now keen to cut rates as soon as the data allows. Initial expectations had been for the US Fed to move first. However, hopes for an early cut in US rates have been delayed by the recent spate of stronger economic data. Speculation is building that the Bank of England may now be the next major central bank to cut rates, hopefully in June, as inflationary pressure is set to fall further as the Ofgem energy price cap is cut by 12.3% in April. The positive scenario is that interest rates are cut just as the economy is showing encouraging signs of picking up.
Commodity prices are on the rise. The CRB commodity price index has climbed by double digits so far this year, outperforming US tech stocks. The catalyst has been the prospect of falling rates combined with stronger demand and evidence of a recovery in manufacturing. Another key long-term driver is the infrastructure build-out required for the green energy transition. Years of underinvestment across the commodity complex is leading to supply constraints that are likely to keep prices higher for longer.
Gold prices have spent a good chunk of 2024 setting a string of new all-time highs. Coming after repeated failures to breach $2100 over the past four years, this latest move looks like a significant breakthrough. Over the long-term gold has proved a strong store of value. Its returns have averaged a respectable 8.5% per year since 1971, only slightly behind US equities and ahead of both global equities and bonds. The recent strength is being driven by the prospect of lower rates, strong buying by central banks and concern over excessive deficit spending by the current US administration and the potential for a policy mistake should central banks proceed too quickly with rate cuts while inflation is still elevated.
On the equity front, an improving economic outlook combined with the prospect of lower rates is a positive environment for the UK, especially when combined with extremely cheap valuations and a market that has noticeably lagged its global peers. One of the many factors which in the past has been a drag on the UK market has been its outsized exposure to oil and mining stocks, particularly given weaker growth in the Chinese economy last year. However, prices are rising once again and looking forward, equities are well placed to capture any further gains in these sectors.
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. It’s worth noting that the US equity market has reached expensive levels on several valuation measures, as gains in the market have consistently exceeded the rate of earnings growth in recent years. On a technical basis this market is also due for a pullback following recent gains.
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. Incorporating alternative assets such as a physical gold ETF, gold mining, energy and commodity stocks allows us to hedge against inflation and other risks and capitalise on the wider opportunities outside of traditional bonds and equities. Our key objective is to capture the upside in financial markets and at the same time ensure that portfolios are robust across a range of market conditions.
